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Old 10-08-2010, 12:55 PM
 
73 posts, read 310,740 times
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Please help settle this debate with a friend who was an Econ major in college but has me confused on this logic. He argues that hypothetically if your raise matched inflation every year your real spending power would actually increase slightly every year.

This doesn't make sense to me, there are obvious exceptions such as paying off a mortgage at a fixed payment and technoligical advances will increase the standard of living for everyone. However, I say you will have the same salary every year in terms of "real" spending power.

He argues that inflation only effects us if we buy the same exact good over and over. He says that as consumers we can make decisions by choosing subsititutes for lower prices that allow us to "beat" inflation on a lot of purchases. I argued this is true but doesn't have anything to do with inflation.

This was brought up discussing government jobs that once you reach the highest pay grade, your income is only increased to adjust for inflation. So the question is, if you salary raises match inflation every year, are you effectively making the same when comparing year 1 to year 10?
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Old 10-08-2010, 02:01 PM
 
Location: Atlanta, GA
1,181 posts, read 1,766,071 times
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I believe your friend could very well be right. If inflation is 2% a year, a 24k income would be 29k in a decade if raises match inflation. If you live the same way, buying the same things, and your rent, gas, everything rises with inflation, you're no better off (or worse). If you have a mortgage, it stays the same though.

But in reality, look at how TV prices are tanking Flat-screen prices to tumble ahead of holiday season - Sep. 23, 2010 or the fact that we have Hulu, or Facebook, or the fact that cars today look and run better than ones ten years ago.

Where exactly are you disagreeing with him... There is the possibility that inflation outpaces the standard of living like the 70s, but it's rare.
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Old 10-08-2010, 02:11 PM
 
Location: West Orange, NJ
12,545 posts, read 18,427,879 times
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hey chicubs, i'll have to talk to some of my buddies about this one, but i was a business major and so were most of my friends and i think his premise is flawed. definitely not an econ expert though.

inflation and are ability to buy goods is based on a standard basket of goods. so if salary rises with inflation, we're never better off or worse off against the standard basket. beyond that standard basket, other goods' prices are not in a vacuum. i'd be willing to bet that the value of your home appreciating or depreciating has some sort of correlation to what's happening with people's salaries, but maybe not exactly. so this is where i think he could be right. but there's few "goods" that we buy in this manner, so what goods is he saying we can get substitutes?
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Old 10-08-2010, 02:39 PM
 
Location: Atlanta, GA
1,181 posts, read 1,766,071 times
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I already mentioned a few already. You don't even need to drop to lower price brackets, most things get better over time.

Internet is instant now. You can download songs in a few seconds when it used to take 15 minutes. And that is basic DSL compared to $20 AOL.

Or look at TV and how people dressed in Seinfield, can you believe how ugly they were? Clothes these days, even at Ross/Kohl's is decent and affordable.
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Old 10-08-2010, 02:51 PM
 
26,075 posts, read 28,473,598 times
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Quote:
Originally Posted by chicubs View Post
Please help settle this debate with a friend who was an Econ major in college but has me confused on this logic. He argues that hypothetically if your raise matched inflation every year your real spending power would actually increase slightly every year.

This doesn't make sense to me, there are obvious exceptions such as paying off a mortgage at a fixed payment and technoligical advances will increase the standard of living for everyone. However, I say you will have the same salary every year in terms of "real" spending power.

He argues that inflation only effects us if we buy the same exact good over and over. He says that as consumers we can make decisions by choosing subsititutes for lower prices that allow us to "beat" inflation on a lot of purchases. I argued this is true but doesn't have anything to do with inflation.

This was brought up discussing government jobs that once you reach the highest pay grade, your income is only increased to adjust for inflation. So the question is, if you salary raises match inflation every year, are you effectively making the same when comparing year 1 to year 10?
The CPI is not a perfect measure of inflation. They try to adjust for quality improvements, but in actuality, that's very tough to do. How do you adjust for safety improvements in cars? For less air pollution because of cleaner burning cars/factories?

Also, the CPI takes into account the substitution effect, but once again, how well it does this is an open question.
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Old 10-09-2010, 03:48 AM
 
71,459 posts, read 71,629,249 times
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correct mystical,,, we discussed this many many times here. the cpi isnt a measure of your cost of living. its only a measure of price changes on goods and services that may or may not apply to you.

cost of living is much more complex.. it incorporates price chages x how many times you buy that item x a factor that is about the quality and status of the products you buy. higher end products usually carry more in price increases then the lower end of product lines.

each of our cost of living is unique to only us.. perfect example was our neighbor in nyc. my neighbor who lives in the apartment next door was almost un-scathed when oil broke 100 a barrell.

they were locked in with a lease,didnt pay for heat and didnt own a car... i on the other hand had to feed a car and heat our 2nd home so i was greatly effected by it.
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Old 10-09-2010, 09:44 PM
 
Location: Maryland
1,534 posts, read 3,779,985 times
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If you really want an education, go to the BLS site and look at the composition of the basket of goods and services that go into the CPI. Then think bout how often you purchase each item. That will give you a better view on price change's impact on your real economic situation.
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Old 10-09-2010, 09:53 PM
 
17,720 posts, read 19,782,023 times
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I see it differently... suppose your income went up at the rate of inflation which is only an average of things and it doesn't include many other things that you will use and are likely to increase at a greater rate than inflation... if the average lows in the inflation rate were stuff you didn't use/buy as often and the average highs were stuff you did use/buy pretty often, you would be on the losing side of inflation... You could try to cheat it by buying cheaper stuff but what are you getting? Cheaper stuff than last year and that's supposedly better? Just because you are cutting back doesn't mean you are doing better... besides that what about big size purchases like cars and houses... if they went up 3% and your salary went up 3%, you would be in a terrible position, all your raise went to pay for the house and nothing leftover to pay for the increased costs of other goods/services... I suppose you could buy cheaper but the end result is still the same, your buying power is substantially lower and that's not a good thing...
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Old 10-10-2010, 03:28 AM
 
4,399 posts, read 9,050,585 times
Reputation: 2352
Quote:
Originally Posted by chicubs View Post
Please help settle this debate with a friend who was an Econ major in college but has me confused on this logic. He argues that hypothetically if your raise matched inflation every year your real spending power would actually increase slightly every year.

This doesn't make sense to me, there are obvious exceptions such as paying off a mortgage at a fixed payment and technoligical advances will increase the standard of living for everyone. However, I say you will have the same salary every year in terms of "real" spending power.

He argues that inflation only effects us if we buy the same exact good over and over. He says that as consumers we can make decisions by choosing subsititutes for lower prices that allow us to "beat" inflation on a lot of purchases. I argued this is true but doesn't have anything to do with inflation.

This was brought up discussing government jobs that once you reach the highest pay grade, your income is only increased to adjust for inflation. So the question is, if you salary raises match inflation every year, are you effectively making the same when comparing year 1 to year 10?
Your friend is correct. However there is a caveaut in that it depends on the person's ability to "avoid" inflation. If the prices of food are inflating for instance that is not something you can avoid etc.
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Old 10-10-2010, 03:32 AM
 
4,399 posts, read 9,050,585 times
Reputation: 2352
Quote:
Originally Posted by evilnewbie View Post
I see it differently... suppose your income went up at the rate of inflation which is only an average of things and it doesn't include many other things that you will use and are likely to increase at a greater rate than inflation... if the average lows in the inflation rate were stuff you didn't use/buy as often and the average highs were stuff you did use/buy pretty often, you would be on the losing side of inflation... You could try to cheat it by buying cheaper stuff but what are you getting? Cheaper stuff than last year and that's supposedly better? Just because you are cutting back doesn't mean you are doing better... besides that what about big size purchases like cars and houses... if they went up 3% and your salary went up 3%, you would be in a terrible position, all your raise went to pay for the house and nothing leftover to pay for the increased costs of other goods/services... I suppose you could buy cheaper but the end result is still the same, your buying power is substantially lower and that's not a good thing...
No I don't agree. The argument isn't to simply buy cheaper lower quality products. The argument is that you can shift your spending to things that are not inflating in price. Hypothetically switching from DSL to cable, buying one type of material of clothing versus another. Buying chicken instead of pork etc etc.

Also if your salary went of up 3% and your cost of livning went up 3% you would be in exactly the same position as before not worse off. All your raise will not go to pay for your house. Whatever percentage of your spending is house and car that is where your percentage of your pay raise will go. The rest will go to your other expenses....
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