Collection: Warren Buffett - #356 'CPI Is Not A Good Measure Of Inflation'



[Transcript]

AUDIENCE MEMBER 00:00

Hi, there. Alex Rubalcava from Los Angeles.


Warren, you just brought up the topic of inflation, and so I wanted to ask, do you believe — or do you believe that the Consumer Price Index is a good and true and accurate measure of inflation?


WARREN BUFFETT 00:20

Well, that’s a good question. Bill Gross has written a little bit about that in some of his PIMCO methods and — messages. And, you know, if you go out to the Furniture Mart and construct a price index, it hasn’t moved very much.


I mean, it makes it very tough for comparable store sales when you were selling DVD players at X few years ago, and now you’re selling them at a quarter of X. So there’s certain areas that there have been a huge — in effect, deflationary aspects.


But I do think the CPI — and, like I said, Gross has written about this — but the CPI is not particularly a good index.


I always get a kick out of when they talk about the core CPI, and then they — and they say that excludes food and energy.


You know, food and energy strike me as pretty core to anything, in terms of the average — I can’t think of anything that’s much more core.


The CPI, as you may or may not know, many, many years ago had housing figured in directly.


There is no — the CPI now has a rental — which is an imputed rental type computation. It’s still a large portion of the CPI, but it does not reflect the new housing prices, or —


And rentals — the rental factor has lagged, in my view, significantly below what housing costs really are for an American family. And since housing is a big portion, I don’t think it picks it up well.


So I would say that the CPI has understated inflation for a great many people.


Now, if you’re older and you own your own house — I mean, everybody has their own way of living.


And, I mean, if all you do is drink Coca-Cola all day, you know, Coca-Cola hasn’t gone up in price enough, in my view, and you — my CPI has not changed very much.


But for somebody buying a new house versus 6 or 8 years ago and driving 30 or 40 miles to work or having a lot of driving in the family, the CPI has gone up a lot more than the government figures would indicate.


Charlie?


CHARLIE MUNGER 02:40

Yeah. I see it at Costco where there’s been almost no inflation in the composite product that flows through Costco, and, yet, in other places you get these dramatic rising figures.


I don’t feel sorry for the people that pay $27 million for an 8,000-foot condo in Manhattan. You know, if they’ve had little inflation, I guess it doesn’t matter to the rest of us.


But it’s almost weird the way the situation works in terms of how it’s —


WARREN BUFFETT 03:17

Yeah.


CHARLIE MUNGER 03:17

— it comes in just a few places.


WARREN BUFFETT 03:19

If you look at the Costco annual report or the Walmart annual report — these are huge enterprises — and you’ll see their LIFO adjustment is just peanuts.


CHARLIE MUNGER 03:27

Almost nothing.


WARREN BUFFETT 03:28

Yeah. Just peanuts — is Costco on LIFO for —


CHARLIE MUNGER 03:32

Sure.


WARREN BUFFETT 03:32

— for fuel? I know they’re on LIFO generally. Are they on it for gasoline or not?


CHARLIE MUNGER 03:36

I think so. I can’t imagine they’re not.


WARREN BUFFETT 03:38

Yeah. But they wouldn’t have a large inventory relative to —


CHARLIE MUNGER 03:41

No.


WARREN BUFFETT 03:41

— their sales volume. But they — at Walmart, it’s inconsequential. I just got through reading their annual report, and the LIFO adjustment isn’t worth a hiccup, you know, basically.


And you’re dealing with 300 billion — well, in the United States a little less than that — but $200-and-some billion worth of sales, and the LIFO adjustment would have picked up changes in prices of that mix overall relative to their inventory level.


So in jewelry, you know, because of gold and some things, we had some big LIFO adjustments last year.


Steel, we’ve had big LIFO adjustments. We have a steel service center in Chicago and we buy a lot of steel at MiTek and there’s a big LIFO adjustment. So it’s very uneven.


Carpet went no place for 20 years, but because it’s petrochemical-based, there have been substantial price changes in the carpet business in the last couple years.


And our LIFO — we had a LIFO net — a minus LIFO figure, in effect — 3 years ago, and now we have 100 million or so of LIFO adjustments. So there’s been a significant price change there.


I think overall, though, for a typical young family, that the CPI probably underestimates the burden they have faced, in terms of their own living situation.


Number 4.


(Source: https://buffett.cnbc.com/2006-berkshire-hathaway-annual-meeting/)

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[YAPSS Takeaway]

Don't look at CPI to measure inflation.