Hi, welcome back. In this video, we're going to discuss the shortcomings of CPI  or the Consumer Price Index and nominal versus real wages. Okay, so let's start looking at the biases in the Consumer Price Index or CPI, right? The substitution 

bias. CPI assumes we purchase the same number of goods and services  regardless of the price, right? So no matter what the price is, we're going to  purchase the same goods and services regardless of what the price is. So if we  buy Tide, we're going to buy Tide. If we buy Pepsi, we're going to buy Pepsi. You know, whatever whatever that is, that is what we're going to buy because that is  what we like, and there is no substitution for it, regardless of price. Okay, new  product CPI updates. So so CPI updates product pricing every two years.  Therefore, prices are overestimated, pushing CPI artificially higher. So, so notice that if we are if if we are calculating consumer price, the consumer price index,  which which associates for inflation, right? So we're going to we're going so CPI  is going to calculate the inflation rate for us, right? So even it's it's it's calculated. So the CPI is calculated every two years. But let's look at in for instance, let's  look at the prices of a tablet, for instance, right? So so when tablets first came  out, you might have been able to buy them for $500, but over this two-year  span, the price of a tablet might have went from $500 to $250, right? But  because the CPI is only updated every two years, it's going to price in the $500  tablet price. So that is a bias of CPI that doesn't make it accurate, right? So I  think they just do that for simplicity reasons, thinking that prices will remain the  same over time. But obviously, as new technology comes into place and better  products and more competition come into the market, prices will go down. So an increase in quality bias. So CPI does not accurately reflect product quality  increases. Now, you have to understand CPI is a government calculation of  prices, right? And to tell us how we are curbing inflation, how is our government  dealing with inflation of prices, right? Because we want to control inflation over  time, so that consumers are protected, right? So, so, so we're we're discussing  the biases. What's wrong with the CPI calculation, right? So we want to we want to I want to identify first, right, where where there are negativities in this CPI  calculation. Okay, so this is this is an actual government figure that the  government uses all the time to use as an indicator of inflation rates. Okay, so  this is why CPI is important for us. So CPI does not accurately reflect product  quality increases. Okay, so as quality increases, right, the CPI does not reflect  the the increase in the quality, right. So CPI only recognizes price increases and  doesn't justify why the increase incurs. So if we have an increase in quality and  the price goes up, right, you know the CPI doesn't really signify that the quality  increased. They just show the price increase, right? So, so it's it's not as reliable  as it should be. CPI, so for the outlet buyers, CPI only captures prices from retail establishments and does not consider discount shopping, such as Amazon and  Barnes and Noble. Right, so so they're only going to calculate the sales or the  prices that are in the bricks and mortar establishment. Right, you go to Best Buy,

you go to Target, you go to Walmart, you know, and you buy from the store.  You're going to the bricks and mortar location, those are the only prices that CPI  is factoring in to their calculation. They don't factor in online sales, just bricks  and mortar consumer sales that way, right? So this, so, so, so this CPI figure, as it's kind of balanced throughout time, is is not really accurate. But I think they  use it because you know things are are so you know the economy and products  sold are so vast and so large. It's it's really almost impossible to understand the  changes of quality of of every product in the market, and it's hard to really justify  all the price swings of every product in the market. So, if we were constantly  updating, you know, quality and prices in the market, you know, on a daily,  weekly, monthly basis, that process would be very, very, very overwhelming. So, I think our government uses this to simplify the process, take an overall average  and a brief snapshot, and then they can make decisions on that because you  know the the CPI will move in accordance to prices. But I think a lot of times in a two-year span we may not expect the price sensitivity to be or the price  movement you know to be very dramatic. Okay, so so I think two years is okay  just for a on average basis. But to point out that CPI is not perfect, I wanted to  show you the biases and why it's not perfect. Okay, so now we're going to  discuss chained CPI versus regular CPI. Okay, chained CPI is a way to index  spending and taxes, including Social Security benefits. Right, so the chain CPI  is going to incorporate more information than the regular CPI does because the  chain CPI will bring into the fact will bring in the factors of Social Security  benefits, overall taxes, and government spending right on subsidies, where the  regular CPI does not consider those factors, right? So, because of the  government spending, right, and it's not really economic activity created  revenue, right? Our chained CPI will be lower on about a 25 basis point basis,  right? So about 0.25, right? Percentage points lower than our regular CPI,  where regular CPI brings. So remember, consumer price index. We're bringing  in prices from the overall market for all products in the market, and we're seeing  how they are priced, right? So this will give us kind of our inflation factor. So you  can see in the upper left-hand corner, you know, prices were relatively high,  right? They were up, so we saw some some dramatic some some pretty decent  price increases through inflation here. Right, so how does the federal  government? How do they control inflation? Right, they control inflation through  the adjustments of interest rates. So just like prices on bonds, you know, a bond  has an interest rate, right? If interest rates go up, prices will go down. That's just  how the cause and effect works, right? So, if prices on a bond, if interest rates  on a bond go up, or you know, the prices will move down. The same thing. So,  so, so every bank, right? They peg their interest rates to typically the 10-year  Treasury note, right? So the 10-year Treasury note is signified as a risk-free  asset or a risk-free security. So they use that as a benchmark, and then they'll  then they'll adjust their rates higher for risk premium, et cetera. Right. So as the 

Treasury or as the Federal Reserve, right, adjust interest rates higher, it will  naturally push down prices because as interest rates go up, the demand for debt goes down because people have to pay more money on higher interest rates, so that is going to that is going to curb the demand in the market. So people can't  borrow as much money or aren't as willing to borrow as much money because  borrowing costs have increased. Right, that is going to put downward pressure  on prices because remember, demand is slowing, right? Demand is slowing, so  so the Federal Reserve can really curb inflation through interest rates, right? So  so here at this 3.5% real CPI or regular CPI index number, right? We can see  that you know interest rates were probably pretty low here, right? Interest rates  were probably pretty pretty low, so so so prices were rather high because the  demand for products were elevated because you know debt was cheaper. You  know your credit card, so if so so all of your debt is tied to 10-year T-bills,  essentially, right? So your credit card adjustable rate will be tied to the  fluctuation of Treasury bills, right? So, so, so the Federal Reserve can really  control and curb the, you know, market enthusiasm or market sentiment through interest rates, right? So, I would say there was probably a low interest rate  environment here, right? And then maybe the Fed or you know saw or whatever  regulatory agency may have saw, you know, hey, look, you know, prices are  getting a little high, the market's getting a little hot, we need to deter consumers  from demanding so much in the economy. So let's raise rates, right? Let's raise  rates up so that we can make the cost of debt more expensive. So consumers  will be less willing to spend through debt mechanisms, and then they'll burn  through cash faster, right? So, so, so most investors or most consumers are not  willing to part with their cash as easily as they could or would with borrowed  money. So, with higher interest rates, a decline in spending happens. So, if a  decline in spending happens, that means the demand has weakened. So,  therefore, there's going to be too much supply in the market, right? Which will  automatically push prices down. So this is how the Federal Reserve and the  appropriate regulatory agencies control prices, control inflation, right through  interest rates. Okay, so you can see that you know, so so prices got pretty low  around the middle of this chart, and then that was good. That was good. That's  probably healthy for the economy to see a little pullback because you don't want to see markets get red hot and too high, and prices get inflated too high, and  then you'll see a market crash. Right? We don't want because you know it's it's  the raw relativity right. If it goes up, it's going to come down, and it's going to  come down in a reciprocal manner, right? So if this market goes straight up, it's  probably going to come straight down at some point. So we want to see the  market go up incrementally, right? We don't want to see a big run up, right? We  want to see a nice, healthy, steady run up, right? So at this point, you know,  interest. So interest rates were probably low. Consumer spending was high.  Prices were getting inflated too fast. So the Federal Reserve steps in and says, 

"Hey, we're going to curb this enthusiasm. We're going to curb this market  sentiment, and we're going to push prices down because we don't want the  economy to get too hot, right?” So they'll use the interest rate mechanism, the  adjustment in rates to really control the economy and prices, right? So this is  what we want to illustrate here. So now let's look at real wages versus nominal  wages, right? So the nominal wage is the wage measured in money, dollars in  the United States, right? So the real wage is the nominal wage in the economy  adjusted for changes in purchasing power, right? So this is purchasing power,  right? What is our purchasing power like, right? So down here, right, we  probably have more purchasing power because prices are cheaper, right?  Versus here where prices were high, we probably have a little less purchasing  power, right? So it is defined as the nominal wage divided by CPI, right? So let's  look at it today. So here's the equation to figure out. So so we want to find out  the dollars today, right? How much is $1 million in 1960? Considering these two  price index numbers, right? Okay, these are just given. Okay, these index  numbers are given. You can find them at the ustreasury.gov, right? That's where  I picked them up from. So, so 1 million, so $1 million in 1960. So we see the  consumer price index figures here, right? So we say the consumer price index  today divided by the CPI in the past, right? So we have the 1960 value of CPI,  right? And we want to find the dollars today. We just put 1995 for just simplicity,  whatever, just random number year chosen, right? So 1995. So we want to find  out what was a mil, what is a million dollars in 1960 worth today, right? Let's just  say it's 1995. So the CPI number 1995 was 160.5 divided by the CPI number in  1960. So now we have $1 million. We want to know how much $1 million is  worth worth today if we had a million dollars back in 1960. So if you do the  calculation, you'll see that $1 million in 1960 is worth $4.8 million today. 



آخر تعديل: الاثنين، 31 أغسطس 2026، 12:12 PM