I am trying to do a thought experiment. What would it take to have the same standard of living from 1965 (or an arbitrary date, but let's pick 50 years ago) in 2015?
Simply using CPI has a lot of flaws for this sort of purpose, since it basically self-adjusts based on what people actually
are spending and attempts to self-corrects for increased standards of living. As an example of what this effect is, look at
Example 6 and how the "before/after" price for a 27" CRT vs a 42" Plasma TV are effectively adjusted to be account for this.
Even though the price increased 5x for the additional quality/size, the way CPI treated it results in a slight
decrease in cost (-7.1%). However had this person not chosen to upgrade (the scenario I am interested in understanding) it would have resulted in a more significant drop in CPI as CRTs basically have become free.
From an absolute perspective this means that the quality of life before (a small CRT TV) is inflated into a Plasma TV for purposes of calculating CPI. I don't "care" about this value increase in my question here - I would rather take a 27" CRT (let's pretend that was in 1965) and calculate what
that TV would cost me in 2015 (or in our case probably the cheapest LCD/Plasma equivalent). And not factor in what the current best TV replacement/upgrade would cost.
CPI does the latter - its calculated, obviously, based on items people are purchasing. Using hedonic regression algorithms they attempt to weight the index based on the increases in quality when that quality comes with cost increases.
I am wondering if there is any way to effectively factor this out of the "pseudo CPI" as I am interested in to more directly answer:
- How much money (in 2015 dollars and products) would it take to live a lifestyle common during 1965?
The reasons I want to do this are to understand the interactions of calculated CPI inflation (since we can easily obtain this) and lifestyle inflation (or lack thereof) on an FIREd person.
My
speculation is that by choosing to avoid lifestyle inflation, one has a much lower "personal inflation" rate than what CPI will indicate. Depending on how different, it could have significant implications on planning ER.