The Hedonic Pleasure Indexâ„¢: An Enhanced Model for Spending Inflation

Shambo, James A.
November 2008
Journal of Financial Planning;Nov/Dec2008, Vol. 21 Issue 11, p44
Academic Journal
• This paper challenges the accepted use of the Consumer Price Index as the benchmark for spending inflation in simulation software and safe-initial-withdrawal studies. • The author deconstructs CPI-U to explain why the price index is a poor measure of spending inflation and proposes an afternative measure (the Hedonic Pleasure Index™) based on individual consumption growth. • This paper uses data from the Bureau of Economic Affairs' "Personal Consumption Expenditures" from 1929 through 2006 and the Bureau of Labor Statistics' annual Consumer Expenditure Surveys from 1984 through 2005. • The paper also reviews the "consumption function" an economic theory that offers startling yet simple insights into consumption behavior. It explains why consumption growth for some young, upwardly mobile clients will exceed CPI by 300 basis points annually for the next 30 years. • The paper provides advisors with a short consumption questionnaire to personalize clients' real consumption growth. The goal of the questionnaire is to convert the Consumer Price Index into a real spending index by asking behavioral questions and considering individual spending attitudes. • Simulation results using real consumption growth of 55 basis points during retirement required an additional 7.5 percent savings, which in turn reduced the safe initial withdrawal rate threshold by 30 basis points. The paper concludes that inflation assumptions in simulation software should focus on client consumption behavior, not government price indexes.


Related Articles

  • Consumer prices stay cool. Investor's Business Daily // Investors Business Daily;8/20/2014, pA02 

    July's consumer price index rose just 0.1%, with the same slim gain excluding food and energy. Consumer inflation cooled to 2% from 2.1% in June. Core inflation held at 1.9%, though it fell fractionally. The Fed may tread carefully on raising rates, but declining gas prices might prompt more...

  • Prices.  // Montenegro Economic Trends;Jul2004, Issue 17, p30 

    Presents the latest developments in economic prices in Montenegro in 2004. Comparison between the average annual inflation in the country for the first quarter of 2004 and the fourth quarter of 2003; Changes in the main consumer price index aggregates; Information on the prices of clothing and...

  • South Korea: Further Monetary Tightening Ahead.  // Emerging Markets Monitor;4/11/2011, Vol. 17 Issue 3, p10 

    The article reports on the Consumer Price Inflation (CPI) rate in South Korea in March 2011 and the forecast for the second quarter of 2011. The main drivers for the increase in CPI are food and transport. The government is expected to increase efforts to fight inflation in the following months....

  • Inflation and Prices.  // Economic Trends (07482922);Jul2001, p2 

    Examines the relation between inflation and prices in the United States. Hike in consumer price index; Behavior of retail prices; Moderation in domestic spending.

  • Reconciling the CPI and the PCE Deflator: 2nd quarter 1982. Bunn, Julie A.; Triplett, Jack E. // Monthly Labor Review;Oct82, Vol. 109 Issue 10, p28 

    Presents the reconciliation of two major inflation measures, the consumer price index (CPI) and the implicit price deflator for personal consumption expenditures (PCE) in the U.S. Period-to-period changes in price measures; Components of the difference between the CPI and PCE; Cumulative...

  • Reconciling the CPI and the PCE Deflator: first quarter 1982. Bunn, Julie A.; Triplett, Jack E. // Monthly Labor Review;Jul82, Vol. 105 Issue 7, p37 

    Reports on the reconciliation of the major inflation measures, the Consumer Price Index (CPI) and the Implicit Price Deflator for Personal Consumption Expenditures in the United States. Reconciliation of period to period changes.

  • Is the CPI vulnerable to mood swings? Jamil, Amirul Syakirin Ahmad // Penang Economic Monthly;May2011, Vol. 13 Issue 5, p60 

    The article focuses on consumer price index (CPI) which records inflation in prices of commodities. It states that 75 percent of price is calculated on the basis of rental, fuel and energy consumed whereas 17 percent of price is calculated form leisure activities, miscellaneous spending and...

  • Inflation and Prices.  // Economic Trends (07482922);Jul2006, p2 

    The article discusses the condition of inflation and retail prices in Cleveland, Ohio. The Consumer Price Index (CPI) continued to rise at a rate of 5.5 percent. The CPI excluding food and energy rose at a 3.6 percent annualized rate, while the median CPI surged at a 4.3 percent annualized rate....

  • Do Minimum Wage Increases Cause Inflation? Cuong, Nguyen Viet // ASEAN Economic Bulletin;Dec2011, Vol. 28 Issue 3, p337 

    It is often argued that minimum wage increases can lead to increased inflation. This paper examines the impact of minimum wage increases on inflation in Vietnam during the 1994-2008 period. Inflation is measured by a monthly overall Consumer Price Index (CPI) and a monthly food CP1. It is found...


Read the Article


Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics