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Price Inflation Measurement

first posted: 2025-07-22 04:23:56.359577

Understanding Inflation: A 20-Year Perspective

It is difficult to distinguish 3% from a 6% annual price increase if it happens every few month, however, the cumulative effect over many years is felt as a loss of status if income does not follow. Many people claim that inflation is underreported, but how much is long term inflation?

The measurement over 20 years varies with the reference point:

  • 3% to keep up with median US consumers
  • 4.5% to keep up with US elites
  • 7% to keep up with international elite (e.g., grass-fed beef, wild salmon roe)

Consumer Price Index (CPI) Definitions and 20-Year Trends 2% - 3%

There are several official measures of CPI varying from 2.2% to 3%. The most common one is 2.5%.

  • CPI-U (All Urban Consumers): Measures price changes for a basket of goods and services for urban households. In 2005, CPI-U was 195.3; in 2025, it reached 322.56. Annual rise: 2.5%.
  • CPI-W (Wage Earners): Focuses on households with wage earners, used for Social Security. Similar to CPI-U, rose from ~190 in 2005 to ~315 in 2025. Annual rise: ~2.5%.
  • CPI-E (Elderly): Weights medical and housing costs higher for seniors. Grew ~0.2–0.5% faster than CPI-U, from ~195 to ~330. Annual rise: ~2.7–3.0%.
  • Chained CPI: Accounts for consumer substitution to cheaper goods. Slightly lower than CPI-U, rose from ~190 to ~310. Annual rise: ~2.2–2.4%.

Median CPI Estimates 3.1%-3.6%

US Median incomes grew slower than average income since 1980 due to the divergence of elite income after the globalisation affected the middle class..

We expect median earning or housing spend to reflect the middle class adjusted down their spending products as they lose spending power. These numbers should rise slower than inflation, unless the middle class quality of life is improving.

  • Median Household Income: Increased from USD 46,326 in 2005 to USD 85,000–90,000 in 2025. Annual rise: 3.1–3.4%.
  • Median House Price: Rose from USD 229,100 in 2005 to USD 420,000–434,000 in 2025. Annual rise: 3.1–3.3%.
  • Median Rent: Grew from USD 8,736 annually in 2005 to USD 17,400–17,640 in 2025. Annual rise: 3.5–3.6%.
  • Hedonically Adjusted CPI: Since median income, house prices, and rent reflect typical household costs, they suggest a median CPI of 3.1–3.6%, ~0.6–1.1% above official CPI-U, accounting for hedonic adjustments understating costs for "normies."

Elite CPI Estimate 4.46%-5.37%

Conversely, elite spending is expected to increase faster than inflation, reflecting the fact that elite earn a greater portion of national income. We look at locally produced and consumed goods and services. We expect these to rise faster than inflation.

  • Premium Florida Condos: Price per square foot rose from USD 1,000–1,500 in 2005 to USD 2,000–3,500 in 2025. Annual rise: ~5.37%.
  • Harvard Law School Tuition: Increased from USD 32,800 in 2005 to USD 81,100 in 2025. Annual rise: 4.63%.
  • UPenn Wharton MBA Tuition: Grew from USD 36,510 in 2005 to USD 87,200 in 2025. Annual rise: 4.46%.
  • Elite CPI Conclusion: These luxury goods and services suggest an elite CPI of ~4.5%, reflecting higher inflation for affluent consumers.

Food Hedonic Adjustment 6.89%-7.26%

Definition: Hedonic adjustments assume consumers switch to "equivalent" products (e.g., Arabica to Robusta coffee) to maintain utility when prices rise, potentially understating CPI. Luxury food prices reflect the relative spending power of american elites vs world elites.

  • Grass-Fed Ribeye Example: Price per pound rose from USD 8.50 in 2005 to USD 35 in 2025. Annual rise: 7.26%.
  • Iberico Ham Example: Price per pound rose from USD 22.50 in 2005 to USD 85 in 2025. Annual rise: 6.97%.
  • Wild Salmon Roe Example: Price per pound rose from USD 17.50 in 2005 to USD 65 in 2025. Annual rise: 6.89%.
  • Feitian Moutai Example: Price per 500ml bottle rose from USD 30 in 2005 to USD 260 in 2025. Annual rise: 11.37%.
  • Dom Pérignon Example: Price per 750ml bottle rose from USD 130 in 2005 to USD 325 in 2025. Annual rise: 4.72%.
  • Maine Lobster Example: Price per pound rose from USD 9 in 2005 to USD 14 in 2025. Annual rise: 2.22%.
  • Arabica Coffee Example: Price per pound rose from USD 1.20 in 2005 to USD 3.50 in 2025. Annual rise: 5.54%.
  • Château Cheval Blanc Example: Price per 750ml bottle rose from USD 350 in 2005 to USD 575 in 2025. Annual rise: 2.50%.

While the Feitian Moutai inflation illustrates the relative gain in spending power of affluent chinese, stapples such as grass-fed ribeye show that the affluent american consumer is losing ground, as inflation beats that of Harvard Law School tuition fee or Florida premium condos.

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The bottle of Feitian Moutai had an annualized inflation of 11% over the last 20 years.

Research on CPI Restatement

  • ShadowStats (John Williams): Estimates CPI understates inflation by ~2–3% using pre-1980 methods, suggesting 4.5–5.5% true inflation, though criticized for exaggeration.
  • NBER (2023): Finds CPI understates inflation by 0.5–1.2% for low- and middle-income households due to housing and necessity costs, aligning with 3.1–3.6% median CPI.
  • Chapwood Index: Reports real-world inflation at 3–4% for middle-class budgets, supporting a 0.6–1.1% CPI understatement.
  • Uncertainty Range: Economists typically discuss CPI biases of 0.3–1.2% annually, due to hedonic adjustments (~0.3–0.5%), substitution effects, and basket mismatches.

Data supports a 2% understatement measured for elite products (tuitions), while middle class inflation should be below CPI but is 1% above the reported number of 2.5%. For internationally competitive products such as grass-fed beef and other premium foods, we see a 4% understatement.

Inflation as a hidden tax

As some countries charge a capital gains tax on real estate disposal with no deduction for long term holding. The question then is how much extra investment income does one need to generate to recover this tax. The answer is that the extra rental yield or appreciation should be CGT tax rate x (US inflation + long term ccy trend) to cover the hidden inflation tax. We can then estimate required long term investment income in the Philippines, Thailand, Indonesia, Malaysia, ...