Ed Butowsky: Calculating The True Cost of Living Increase

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Over the past decade, we've been told that inflation has been tame -- actually below the target the Federal Reserve would like to see. But if that's true, then why does the average household find it harder and harder to get by?

The ugly reality is that the true annual cost of living increase is far outpacing the government's reported inflation rate. By nearly 10x in many parts of the country.

This week, we welcome Ed Butowsky, developer of the Chapwood Index, to the program. His index is a 'real world' measure of how prices are increasing much faster than the wages of the 99% can afford:

In my business, I wanted to make sure that I was building portfolios that weren’t just efficient but got people the rate of return that they needed. I thought: My goodness, what I need to do is give people a list of everything they spend money on and have them track quarter by quarter exactly their increases, so I can do a better job as a financial advisor in determining what return I need to target.

I got a hold of a list of 50 major metropolitan areas and found people in every city and I gave them a job: I asked everybody to send me what items they spend their after-tax dollars on. I got about 4,000 different items. Then I took the 500 that most frequently appeared on the list and we've been tracking specifically these same items in every city since that period of time. I weight this list based on what percentage of a normal income people spend on each item.

The purpose of this index is to let people know that, if you live in California, your cost of living increase goes up somewhere between 12-13.5% a year. And if you're not making 13% more in salary, then you're losing purchasing power; and that's why people fall further and further behind. If you are in New Mexico, it's about 7%.

Basically, over the last five years, the average increase for all 50 major cities is 10% vs the average CPI of 1.5%. So it's easy to see that for people who are in the middle income, lower income or people who are living off of a pension that's adjusted based on the CPI, they've lost 8.5% of their purchasing power if everything was adjusted to the CPI year over year. Do that over five years, over 10 years -- now you know why there's such a separation between wages and wealth. 

Click the play button below to listen to Chris' interview with Ed Butowsky (38m:05s)

This is a companion discussion topic for the original entry at https://peakprosperity.com/ed-butowsky-calculating-the-true-cost-of-living-increase/

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We've felt all along that CPI numbers are a fraud, this is proof. My question is: doesn't this correlate directly to the purported rate of inflation which we're told is 1.5%. I am convinced that the inflation figures are equally false, and that our economic policy (such as interest rates) which is founded on these false figures is simply put: a massive lie. We are compounding our nation to the poor house. 
Thank you for posting this interview. After reading so much about complex economic theory and exotic financial maneuvering, this hits home, allowing the average person to understand the current economy. Now to go find that extra income source…

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Fudged inflation reporting is one of my favorite subjects gripes.
It is integral to fudging so many other reported numbers, such as GDP growth and overall economic growth vs decline.  As mentioned, it is used to justify lower or no pay raises, cost of living allowances and negative real interest rates on savings.

A couple of points.

Ed mentioned that the top 1% are paid based on performance.  While that may be true of some, I believe there are exceptions.  For example, from everything I've read bankers and financial managers were paid very well in both salaries and bonuses after 2008 regardless of how they performed.  Banks that would have folded had the Fed not bailed them out, largely paid their managers as if their decisions were golden.

The second issue is government debt.  As near as I can tell, US deficits now exceed what can be covered by borrowing money from foreign sources.  It appears to me that more than a small part of the money being printed by the Fed is being used to fund current US deficit spending.

Excellent discussion.

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As anecdotal support of the Chapwood Index, we carefully track how much we spend on food/home supplies year after year. In recent years, our realized inflation rate for these expenses has been 10-11.5%/yr. That doesn't even factor in the 'substitutions' that we've made (goodbye lamb chops hello turkey sausage…), never mind the addition of our gardening and canning efforts to defray expenses and improve health. To compensate, other 'expenses' have been progressively axed over the years. Theoretically my salary goes up every year but financially we are stretched more and more over time. Thankfully we have no debt to weigh us down further…

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I calculated my families inflation rate using the federal numbers for each category of expense and our actual exposure to that category.  Even using federal numbers we were at 11.3% from 2011 to 2012. 

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The cost of living going up is another way of saying the standard of living is falling, no?  Of course the government is doing to do the best it can to disguise this fact.  Are they going to come out and say "We have discovered the world has passed peak easy oil.  This means that this well populated, interconnected world is in store for some dramatic changes over the next 20-30 years, and it's probably not going to be very pleasant"?
 

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It is so FRUSTRATING that the CPI, inflation, unemployment, etc are such false statistics.  Ed Butowski interprets the consequences from a right wing perspective, while I'm likely to interpret it from a liberal / leftwing perspective (as a small business owner in the mining industry, of all things). 
It's not the LIBERAL agenda that creates this "false reality", Ed.  All intelligent people on all sides of the spectrum are seeking the truth.

I'm a social liberal.  A hard-working business owner.  I'm as frustrated as the rest of you (us!) about the false statistics that our government is publishing.  It's not right!  And it has gone on through the administrations of Kennedy, Nixon, Ford, Reagan, Bush 1, Clinton, Bush 2, Obama…

Thank you, Ed. for tracking and publishing real data.  We know from our own experiential evidence that the published CPI is a lie.  It helps to know that I'm not the only one seeing one thing and hearing a line of B.S., wondering what is real and what is false.

Keep up the good work, Ed, but don't assume that the authoritarian-oriented right-wingers the only ones seeking the truth.  There are more of us than you realize that seek truth over lies and obfuscation. 

 

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I knew going into retirement with a small pension and whatever savings I had that eventually real inflation would eat it all away. You can run as fast as you can … but still not keep up with a hockey stick chart. dryam2000 listed one of the problems - we're past peak easy oil. A bigger one is that all the unfunded government promises are finally coming due. It is going to get much worse as more and more Boomers retire.
Governments exist to provide services. We the people want more and more. A politician who can promise more without having the voters actually pay for it will get the nod. We can pretend that someone else will pay (the rich) or we can pretend that some accountant's rosy projections will actually come true (stock markets going up 8% per year forever) or we can just push off the real cost on the next generation (resource depletion, pollution, SS, Medicare) or even to other countries (China.) There are more options available. All the tactics have been used to the maximum extent. It always worked, so let's try it again. As PT Barnum noted, nobody ever went broke underestimating the intelligence of the average American.

So, what can you do about it? Well, you can try to get another job and trade more of your time for wages that will be taxed. For what? - Bling. Really? Perhaps you can focus on what is really important to you and figure how to provide those things for yourself. Once you get past the basics of food, water, shelter, clothing, and health, the rest is more or less bling. Do you really need it? If you think you do, you better get another job. It is that simple. Next year (or the year after) you'll need another job on top of it. What's the bling really worth?

A friend of mine rents life. There's a leased car, rented apartment, new furniture every 3rd year (or so,) new clothes frequently, the latest electronic gadget, eating out almost every night - you get the picture. Every day, there is a trip to Charbuck's to buy a lousy latte with lots of additives and then a tip. It costs $7 per day. If you only look at the hourly salary (pretax and pre-expenses,) it isn't that expensive. It takes less than 15 minutes to earn that amount. The daily latte habit costs over $200 per month. With all the other "obligations," that is more than what is left over. It gets charged to the credit card. Another day older and deeper in debt. The worst part is my friend can't envision life without the bling.

Don't get me wrong, bling is kind of like spice. A little it wonderful. Too much ruins the meal. I love coffee, so I bought a sturdy roaster that fits in a BBQ rotisserie. Roasting is a fun hobby. I get green beans in bulk and I make lattes at home. I can make a double tall latte for about 75 cents. Of course, I have to take the time to roast and make the coffee. How much should I pay myself to do a hobby?

The bottom line is that it will get worse. Either get off the treadmill or accept your fate. What happens when the treadmill stops working?

Grover

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The idea may be to fool all of us into thinking that we aren't getting poorer by the day but you can't fool the math, at best you can just put off the reckoning a little longer.

  1. At 10% inflation per year your effective income falls by 50% every 7 years!

  2. If you are lucky enough to get a 3% raise every year, your income still falls by 50% every 10 years.

  3. If you try to work your way out of daily expenses with added debt you will just go broke faster. You may feel like you are escaping for a short while but credit card debt (average interest rates of 16-20%) runs much higher than the inflation so your amount of discretionary spending that you can afford quickly hits a wall and drops like a rock.

  4. You can work harder with more hours and more jobs to increase your income which is what many of us have done until we feel that our lives have been consumed. What happened to nights and weekends, never mind vacations? This option is becoming less and less available for many. It is unsustainable in the long run (it damned near killed me) and it still only keeps your head above water a little longer, regardless, unless you can keep increasing your income by 10% or more each and every year.

  5. You can try to be more efficient, modest and thrifty as Grover advises. This is the route my family has taken. Sold the house to rent a smaller one, got rid of things like television service (addition by subtraction!), eating lower on the hog, growing/storing more, etc. This beats wracking up more debt but the fact is that you are only buying yourself more time until you will simply not have enough to feed your family if your purchasing power keeps dropping by half every 7-10 years.

  6. Even if everyone lives lives as thrifty as those who came out of the Great Depression we are in for an economic world of hurt because 70% of the US economy (so we are told) depends on consumer spending. The more we cut our personal expenditures, the more we undercut the general economy, putting more and more people out of work.

  7. The more people we put out of work, the greater the drag on all of our social support systems, exacerbating the whole process further.

When it gets slammed into reverse, this is the death spiral for an economy that is predicated on ever more exponential 'growth'. If I had to guess, I would say that if you could really parse the last several years of supposed consumer expenditures that we have had, you would find that more and more of it is going into basics like food or for durable materials more associated with preppers than preppies.

The only thing holding up our economic house of cards at this point is collective disbelief in our predicament.

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In shooting one learns the difference between accuracy and precision.
To be able to hit the center of the target means you can shoot with accuracy.  To be able to group shots, even if they are all clustered to the far side of the target's center, means one has precision.

The government's CPI (inflation) measure is immensely precise.  See here:

 

Month after month after month the reported rate of inflation is 0.2%/mo (ex food & energy).  Sometimes a tick higher, and sometimes a tick lower.  that's wildly precise.

But as Ed noted, it is also wildly inaccurate.

One the 'features' of offering up such robust precision is that it creates the appearance of authority.  We see this when studies report such things as "26.2% higher chance of death if you do/don't so this!" 

Wow.  26.2% hunh?  that sounds very precise so it must be correct!

Beware false precision.  it is the hide-out of the self-delusional and the purposely misleading.  

Precision is not the same thing as accuracy.

Instead, as we know here, the reported figures are wildly inaccurate.  The gap between the reported precision and ultimate inaccuracy is maddening, because it is so utterly obvious and anybody with the slightest amount of curiosity can determine as much.

Which means the US press is either totally bereft of curiosity or spineless.

 

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My Kaspersky Virus protection program is saying that the Chapwood Index links to an infected web page.
 

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Chris wrote:

Instead, as we know here, the reported figures are wildly inaccurate.  The gap between the reported precision and ultimate inaccuracy is maddening, because it is so utterly obvious and anybody with the slightest amount of curiosity can determine as much.

Which means the US press is either totally bereft of curiosity or spineless.

Another option is that those who own the press are active participants in the deception.
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Combine fractional reserve banking charging interest a finite world and you have the predicament we fine ourselves in. In order to pay an interest fee, the borrower is required to produce value out of newly found materials and turn them into advantageous goods or services for the rest of society. If resources are limited or labor scarce, it forces those required to pay the interest to take from those who have neither resources or labor. To sit and contribute nothing, then charge a fee for access to currency,leads in only one direction – the poor house. I think that explains the peasant wars of the past and the reasons for the growing gap between the wealthy and the rest of us. Inflation? What can you expect. Deflation? Somebody is going to have to get off the sofa and start producing or the result will be obvious. I think I'll check my balance. . Damn; its lower, again! I wonder what kinds of implications this might have?

http://www.cbc.ca/news/politics/youth-budget-important-student-1.3498080

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What is wrong with our industrial farming is the same thing that is wrong with the medical profession, which is the same that is wrong with the banking system, which is the same thing that is wrong with our political system. It is also what breeds the endemic corruption in the "system". And of course, as sand_puppy pointed out, it is collusion, as difficult as that is to accept.  We know that the rating agencies are paid by those entities whose equities they rate, as one example among millions that happens to be top of mind, yet we still, over and over again, put on the pretense that there is somewhere within the system there is an attempt or a desire for fairness, or at its heart, the "system" cares about the good of the whole.  This is emphatically not true (there are of course many fair minded people caught, through momentum in the system).
We have supplanted cultural norms and standards with economic norms and standards. As Joel Salatin pointed out, it is a whole different set of questions the created polyface farms, and indeed if those same questions were asked of any other sector of our society, lets add a few more that were not mentioned above, education, social welfare, the world would be turned on its head.  Yet we still are asking the same old questions, if only the people managing the system were a little smarter, as if we had accurate reporting of the CPI somehow things would be different.  If we had accurate reporting of the CPI the system would look nothing like what exists today.

We didn't fudge the CPI before 1983, not because we were more honest back then, but because we didn't have to yet.  We had not reached the consequences of our own actions yet, as we have now.  Turning back the hands of time will simply land us back where we are now.  The perceptual reality shift that occurred at polyface farms produces fives time the productive capacity of conventional agriculture.  Abundance is here now for the asking, yet we insist on wallowing in darkness. Yet another indicator how badly the system is failing, interesting perhaps because my morbid curiosity has gotten the better of me. What, get another job?!  There is a solution of sorts.  Get out of the system and take as many people with you as you can!

 

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The numbers make sense; why do I believe his rather than Shadowstats?  I don't know.  His method is simpler, perhaps?
In order to figure out the cause, (and possibly a fix), we need to understand where the problem is coming from.  Is it a trade imbalance?  Is it globalization - competing with workers in Vietnam?  Is it primarily monetary - i.e. too much bank lending & deficit spending?  Might it be peak cheap resources?

Here's my thought:

America had a competitive advantage earlier on (through, say, 1970) for four reasons: 1) strong domestic rule of law allowed winners to win, and losers to lose.  This allowed for an efficient allocation of capital.  2) economic imperialism kept resource costs low: the "central banking/warfare model", along with the IMF's "economic hitmen."   3) semi-protected markets prevented wage competition from overseas and/or companies from outsourcing to the LDCs.  4) a large domestic natural resurce base.

Fast forward to today: we've exposed our workers to wage competition with LDCs and encouraged our companies to outsource (making the investor class rich - its more profitable) or import workers that we're short of (H1-B visa workers from India), our domestic natural resource base is diminished, esp in energy, our rule of law has drastically weakened - so all we have left is the central banking warfare model and the economic hitmen.

To cover over the problems during the 30-40 year transition period, we've used debt (government & private) which has caused monetary inflation, but also we've capped wage inflation via globalization.  During the 70s wages would inflate along with the money which would lead to big CPI inflation.  However, globalization stopped the wages from inflating along with the money, so we're only seeing half the CPI "inflation" rate we normally would.  Domestic natural resources losses result in more effort placed into the warfare model to keep resources cheap.

From what I see, it has been a wealth transfer - from the US to the LDCs, and from the domestic wage earners to the international investor class, along with a continuing monetary inflation, but a deflation in wages due to globalization.  As proof, I give you BRIC nations, Asian Tigers, and the top 0.1% including the CEOs that make 300x what their average workers make.  That's where the money went, that's where the money came from, and - I think, that's why.

I do not believe that austerity (restraining growth of government deficits) will fix this problem.  That's only one component of the beast, and not even the largest one.

America has one thing it can definitely control: the rule of law.  It is really useful to have this; it allows new entrants to kill off existing, stagnant businesses w/o the founders getting shot for their effrontery.  We can also engage in a bit more protectionism; keeping jobs in country will benefit our people, at the expense of the investor class.  "Fair trade" vs "Free trade".  Can't go too crazy or you get a capital mis-allocation problem.  We can also control money creation, but attempts to solve the problem via austerity will end up having that nasty first-year recessionary impact.  Plus, we need to fix the private debt problem.  Not sure how to do that.  Some sort of a default needs to happen.  And we need to curtail the central banking warfare model.  Its expensive, and while it does get us cheap resources, we don't have the economic base to keep it going indefinitely.  And its - shall we say - morally questionable.

Ultimately, some reallocation was bound to happen.  The US was vastly richer (per capita) than most of the rest of the world, and that couldn't last forever.  But our own stupidity (and/or a deliberate plan by those who ended up getting the bulk of the reward) accelerated the process.  Accelerating debt (largely) served to hide the problem until 2008.  Now it has pretty much been laid bare.

That's my current thinking anyway.  Ed's cost-of-living analysis simply highlights the ongoing wealth transfer.  And that's all it really is - a wealth transfer.  And if your salary is not going up, and someone else is getting richer, wealth is being transferred from you to them.   But its not just about credit, or deficits, or peak resources.  Address just one of those, and you still have the others that will end up hosing you.

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Just listened to this now. So f****** pissed.

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From The Chapwood Index:

Butowsky began calculating the Chapwood Index in 2008. Using social media, he surveyed his friends across the country to determine what they bought with their after-tax income. He narrowed the list down to the most frequent 500 items and asked his friends in America’s 50 largest cities to check the prices on those items periodically. The Index shows the fluctuation in each city in the cost of items such as:

Starbucks coffee, Advil, insurance (car, house, life), gasoline, sales and income taxes, tolls, fast food restaurants, toothpaste, oil changes, car washes, pizza, cable TV and Internet service, cellphone service, dry cleaning, movie tickets, cosmetics, gym memberships, home repairs, piano lessons, laundry detergent, light bulbs, school supplies, parking meters, pet food, underwear and People magazine.

Wants vs Needs?

Brad

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Aloha! Putting money in the pockets of those in Washington DC who produce the least yet cost the most! This is the "Politician Class" of society that needs to be reduced to a semi-microscopic size. One factor everyone graciously ignores in the cost of goods rising is government. A gallon of gas would cost a lot less without excise taxes on all levels of government.

Beautiful, so 18% of what you spend to buy gas goes to government. That 18% gets added into the supply chain as well, not just your commute. That means the trucks or trains or jets transporting food and other goods to WalMart pay that 18% also. It is also a factor in the manufacturing process. That increases the cost for all goods across the board.

How would you know what the real percentage of taxes is in a gallon of gas. Is it trumpeted from the highest mountain every time government raises tax rates on products and goods and resources? Is it front page news like the Kardasians or Trump rallies? Does any politician mention it in their platform when they run for office? NO! The government is more corrupt than Exxon!

Forget inflation rates … no matter how you want to define it … push pull or whatever! Try adding up what your real rate of taxation is not just your 1040 bracket! The cost of this "road kill" we all lovingly call "our government" exceeds common sense logic. If your car mechanic was half as inept as your Senator how long would you let that mechanic work on your car? Yet, decade after decade we continue to blindly believe total strangers in Washington DC, who do not even know your first name and nor do they care to know it, somehow have your best interest in their hearts! And as voters we have not even a second thought as to the destructive and corrupt nature of the Politics of Debt.  Look around you there are no victims here, only volunteers. If you haven't figured out who the sucker is yet then … whatever … It's all a grand illusion … We can't all be King! Sorry … yeah … in real life there is no trophy for participating! It;s sink or swim … do or die and even if you survive that God awful gauntlet there's still no trophy!

We can pretend all we want, but this is still the same reality since Roman days …

 

 

 

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For anyone looking to save money on prescriptions there is a new heath startup called blink health.For example a 20 mg Prilocec pill retails for 2.60.They offer a generic for 23 cents a pill.This is an answer to outrageous pricing.Want to save money on your eyeglasses?mine cost 400 dollars for nothing fancy.There is a company called Warby Parker that was started by 3 UPENN college students to bust the Luxotica monopoly.How does a 100 dollars sound?I hope these help the PP crowd…

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Most of the revenue from the gas tax goes to road and streets construction, maintenance, repair, and safety.  A small percentage goes to public transportation, which varies by state.  It seems only fair that the cars that are driving on the roads help to pay for those roads through fuel taxes.

Is all of the road & bridge money spent wisely? Not always.  It depends on what state you're in.  In my state, our road construction projects are sent out for competitive bid, and it's one area where capitalism seems to be working.