The Consumer Price Index and it's problematic issues



Also see 'The main issues with CPI and why it is incorrect' (CPPI)



What is the "real" CPI or cost of living? Is the CPI extraordinarily understated?

Average inflation rate per the CPI (2002-2004) is 3.3% per the chart below



Item Average inflation per year, 2002-2004 Data
Housing 14%+ Median US house 2002 = $158,000. Mid 2005 $240,000. (source = US Census and OFHEO data)(see hedonics in the glossary)
Food 7%+
(52% - 2002-9 per the CRB Food index)
The agricultural price index (all farm products) has moved from 95 to 140, about 47% per here
Also ask yourself how much more you're paying for dining out (for the exact same meal) than a few years ago..
7/2007: 23% food price in last 18 months per the IMF
Health care 9.5% "Total national health expenditures increased by 7.7 percent in 2003...In 2004, employer health insurance premiums increased by 11.2 percent" (source). The Health Care Index is also up over 80% in the two year period ending in August of 2005. Health insurance costs doubled since 2000.

See a health care popup chart here, click here for regular link.
See a premiums/benefits popup chart here, click here for regular link.
An early 2007 Washington Post article here.
A mid 2007 article about very large price increases here and here.
9% price increases for health insurance in 2009
Survey: Health insurance costs surged in 2011
Health-Benefit Costs Rise Most in Six Years
9% price increases for health insurance in 2011, 3% in 2010 due to lower demand from recessionary effects
As of early 2012, the BLS index of health insurance is up over 13% since last year
Assuming the Affordable Care Act ('Obamacare') goes into effect as is, we estimate overall medical costs to increase an additional 1.5%/year minimum.
Education 6%+ College education has gone up 5-6%+ per year since mid '90s per here and here. 2005 - Increases in tuition, fees, room and board by the schools ranged from 4.3 percent at Ithaca, N.Y.-based Cornell University, which will charge $41,767, to 5.5 percent at Yale University…, which will cost $41,000… Harvard… raised its rate by 4.5 percent to $41,675. “The University of Colorado’s board of regents approved a 28 percent tuition increase for the 2006 fiscal year", the Denver Post reported.
As of 2009, education costs are still increasing well above the reported CPI rate. Per BLS and BCES data, 4 year university costs have increased at 7.7% per year. Late 2009, University of California tuition prices increase 42%. Coast-to-coast double-digit college tuition hikes
On average, tuition tends to increase about 8% per year. An 8% college inflation rate means that the cost of college doubles every nine years.
"Public four-year colleges charge, on average, $7,605 per year in tuition and fees for in-state students. The average surcharge for full-time out-of-state students at these institutions is $11,990."
"Private nonprofit four-year colleges charge, on average, $27,293 per year in tuition and fees."Source
Even the BLS itself shows that the education segment costs have risen greatly - well over 10x since 1978.
Gasoline 20%+ Wholesale unleaded gas without any taxes in 2002 was about $.75 per gallon average. Late 2004 - $1.40. Mid 2009 - $2.80.
Taxes -1% Tax freedom day remained about the same per the Tax Foundation.
As of the Obama administration, taxes & fees, etc. are slated to rise significantly.
New Cars 2.3% Per Edmunds's data, the increase from 2003-2004 was 2.3%. Overall, new cars have been only slightly inflating on average for many years.
"Other" -10%+ Many consumer items that are infrequent purchases like computers, clothing, DVD players & microwaves have gone down in price. But one doesn't buy them every week or month, and they are not essentials like food, housing, etc.
On the other hand, postal rates and UPS prices are up about 5% per year (2009 UPS rate increase averages 4.9%).
What is this on the inflation "core rate" which excludes food and energy too? Does someone seriously think that a broad price index should not include daily use items like food and energy? We fail to see any purpose for the concentration on it other than political and similar ones. If the concern is truly erratic changes in food and energy, just use a simple moving average.

Note that there are no factors for quality changes, either up or down, so add or subtract your own adjustments as desired.

Does that look like an average of 3.3%, like the CPI states, to you?

We maintain that it has been severely understated for years, by at least half.
In other words, we think it has been at least 6.6% (not 3.3%) during the 2002-4 period. See the adjustment table below to see our best estimate for correction factors.



Actual Consumer Price Index from the U.S. government, and our corrections



Close up, with CPI-W



The broadening gap between CPI and the GDP deflator

The gap between the GDP deflator and CPI started to grow in the late 1970's, and has grown wider since then. For those that may believe there should be large differences betwen the two, please note that the government is by far the single largest consumer in the U.S. In plain English, real GDP is over stated when the GDP deflator is understated.



Some final notes: All we're saying here is that inflation is roughly at least 3% higher than what is being reported and has been reported since when the Boskin Commission Report recommendations were implemented. For our predictions and thoughts on future inflation, please see our forecast and other pages.

Longer term CPI accuracy is also far from accurate. From mid 1955 to mid 2005, CPI has risen slightly over 7 times. During that same period, houses have gone up over 18 times and even Disneyland admission has risen over 15 times.

Lastly and stated again, we think the inflation rate that has been reported and emphasized called "core inflation" is more than a little ridiculous. It's basically the CPI rate after food and energy price changes have been removed - last time we looked, we pay for them every day... and are tempted to make a very sarcastic comment.

Update May 2006, from the government bureau that publishes the CPI (BLS)
Furniture sales were up 9.1%, Electronics 7.2%, Building Materials 14.4%, Food & Beverage 6.1%, Health & Personal Care 7.6%, Gasoline Stations 23.6%, Clothing 6.7%, Sporting Goods 9.3%, General Merchandise 8.5%, and Eating & Drinking Establishments 7.9%.


Click here for a chart of CPI components from 1978-2004, showing the different rises and falls in college tuition to TVs.

Click here for a chart showing changes in US household net worth from 1952-2006, both in raw dollars and then adjusted for CPPI, and here for a closeup of the 1990-2006 period. Notice that the inflation corrected figures are actually multipled by 5 (they're actually 1/5 of what is shown) in order to have them show as other than an almost flat line. As an aside and per the US Census, the average household in 2006 is composed of 2.7 persons.



Estimated CPI adjustment factors to bring it back to reflecting reality

Amount, cumulative As of date Source data
+1.0% 1982 Homeowner's equivalent rent, BLS
+1.5% 1993 Hedonics, BLS
+2.5% 1997 Boskin Commission Report results
+3.5% 2001 Hedonics, BLS
+4.0% 2004 Hedonics, BLS
+4.5% 2005 Hedonics, BLS
+5.0%-5.8% 2006 and on Hedonics, BLS

The definition of hedonics in our glossary contains essential material to help understanding of the CPPI.

Credit and kudos to John Williams at Shadow Statistics

VERY highly recommended. Here is his inflation chart, which even shows higher rates than ours.
Note that we are not using Mr. Williams full adjustments (as of 1/2007, his "CPI" level was around 500 where ours was around 340... and the actual BLS CPI-U was 202). Note also that all we and Mr. Williams are actually doing with the adjustments is to make the CPI consistent over time by using the same formulas, etc, as were used in 1982. In other words, we both are comparing apples to apples and ignoring the changes that have been made since 1982.




Source of CPI-U data as of late 2005 - here and here.






The Case Shiller home price index vs. the BLS Owners Equivalent Rent (OER) data


The difference between real housing price changes and what the BLS uses to track housing costs via the OER is obvious. It severely understates real costs.










Two pictures of the composition of the Consumer Price Index

Note that the government CPI does not include taxes, yet another major problem with it.




10/2007 weights & data



1/2011 weights & data



The official component weights, 2012 update






The Finster Dollar Index
US dollar value changes (and therefore global inflation) in terms of global real goods, services, capital and labor.


The Consumer Price Index
From a series called "Government economic reports: Things you've suspected but were afraid to ask".


Smoothing out inflation
A very good treatment of specific problems with the CPI and how it is calculated.


Japan's fuzzy math and the German scare tactics
CPPI is not limited to just the U.S.


Inflation - Who says it's dead?
A look back to the 1950s & before showing some causes and much larger inflation than many are aware of.



On 3 January 2006, the all items index (in US dollar terms) was 18.5% higher. The food index rose by 13.4%, while the all industrials index, which comprises nonfood agriculturals and metals sub-indexes, was up by 24.4%. The Nfa index increased by 15.6%, while the metals index rose by 28.5%.
(The Economist, 7 January 2006, p. 89).

Hedonics

Source: The Expanding Role of Hedonic Methods in the Official Statistics of the United States


One of the main issues and problem with hedonics is that, paradoxically, it doesn't allow for products that don't exist any more. As an example, the picture-in-picture feature of new TVs is seldom used but is still hedonically adjusted even though a TV without it is no longer available to those who don't want it or use it. The same would apply for many other products and areas, like smaller new houses or apartments no longer existing.

Then we have other quality issues like genetic alterations or irradation in various foods that many think are quality degradations, as well as items like the health and quality differences between corn fed and grass fed beef. Another less than fair quality change example is that the dining room table of many decades ago was mostly made from real wood, not particle board or similar - the basic point being that nowhere in the hedonic area are drops or a lowering in quality taken into account.

Additionally, adjusting for very real improvements like in computers (or even their actual existence) completely ignores and even degrades the natural upward progess of mankind.