The main issues with CPI and why it is incorrect (beta)

Housing   Total medical care   Health insurance   Hedonics, substitition bias, geometric weighting   'Hidden' inflation   Taxes   CPI components, changes etc.   Download CPI & CPPI indexes  



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Social Security recipients



The simplest evidence that CPI substantially understates inflation is the decrease in standard of living and purchasing power of seniors who have lived for a few years with their total income only based on Social Security payments.

In simpler terms, anyone who believes that the CPI is accurate needs to look at how much the actual standard of living of those living only on Social Security has dropped over the last 5-10 years, when using real apples to apples comparisons.

The late 2012 proposal to use "Chained CPI" instead of CPI-W for Social Security inflation adjustments is yet another proof for the doubters that the Boskin Commissions adjustments in 1998-9 had the same purposes - understate the real inflation rate to save money, at the expense of stable purchasing power for seniors on Social Security.

Living on Social Security alone







Housing vs. the BLS Owners Equivalent Rent (OER)



The BLS Owners Equivalent Rent (OER) has done a poor job of tracking real housing costs and expenses and has mostly understated them, for decades.





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The housing price index advanced about 80% more than the OER from 1983-2006, severely understating the real change.


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From 2006-2011, the OER severely overstated the real change in housing costs as home prices returned to the base trend.


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Even the BLS rent measure poorly tracks similar data from the Census Bureau, and has understated rent by almost 3%/year since 2004.



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Health insurance





The BLS has only been tracking health insurance since 2005, but they have understated it substantially when compared to CMS data (raw index data).


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The BLS has only been tracking health insurance since 2005, but they have understated it substantially when compared to CMS data (annual change rate data).


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"The weights in the CPI do not include employer-paid health insurance premiums or tax-funded health care such as Medicare Part A and Medicaid"



A full health insurance price index, including annual change rates, since 1967. It has gone up every year since 1968 when compared on an apples to apples basis.


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Total medicare care



Total medical costs are about 17% of GDP, but only about 7% of CPI?

It's primarily, but not only, due to Medicare and Medicaid not being included in CPI - in spite of recipients being Consumers (CPI is short for Consumer Price Index). Please note that this view is not unique to us, the the NBER noted roughly same data and conclusions in 2001. Also note that the CPI-U does not include employers payments for health care.


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BLS medical cost increases have been about 2% lower then total medical cost since 2000.
That 2% is about 50% of the difference between the BLS figures and the total actual increases per the CMS and Kaiser.


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Grand total medical costs per capita since 1967


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Medical primer, some source data



Medical/health care costs primer


Medical data 1960-2010 tables












Hedonics, substitution bias, geometric weighting, cost of living





The BLS CPI is not a cost of living index, where a certain standard of living is maintained and measured, but rather measures price changes via a market basket approach. It was originally designed to be much closer to measuring a stable & consistent standard of living, but has drifted towards a market basket based index starting around 1968 with Medicare and continuing with the housing OER adjustments in 1982 and the Boskin Commission recommendations in 1996-1999, etc.

"The CPI is generally the best measure for adjusting payments to consumers when the intent is to allow consumers to purchase at today's prices, a market basket of goods and services equivalent to one that they could purchase in an earlier period."

In other and more direct words, it no longer measures real inflation via BLS best efforts, but rather measures what people spend as they change their buying habits when they can no longer afford their previous standard of living for whatever reasons. In spite of that, the BLS continues to assert that the CPI measures inflation ("The CPI is the most widely used measure of inflation" and "The CPI and its components are used to adjust other economic series for price changes and to translate these series into inflation-free dollars." Source).

The Boskin Commission, which completed its work in 1996. focused on three main areas; hedonics or quality improvements, substitution and geometric weighting.