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Does CPI Reflect True Inflation? Some on Wall Street Have Doubts. Article by Forsyth / Barrons
This is supposed to be a free gifted link. While an Ad pops up, i found it possible to knock it out and view article. Let me know if it doesn’t work. Thanks
The U.S. has historically been the gold standard for economic data. However, this doesn't mean that there isn't room for improvement.
Since the 1980s, "owner's equivalent rent" has been used to gauge home prices. To obtain this data, homeowners guess how much it would cost to rent their homes. This "dirty data" is a lagging indicator which may not accurately reflect actual housing costs.
Health insurance premiums comprise a significant part of medical spending for many consumers. However, the BLS does not directly track health insurance premium costs. Consequently, medical spending data tends to decrease CPI price changes.
"Even though insurance premiums are an important part of consumers’ medical spending, the BLS does not directly price health insurance policies. In a direct approach, we would track the movement of insurance premiums, holding constant the quality of insurance, and use these price relatives to build the Health Insurance index. However, the BLS has been unable to consistently control for changes in quality such as policy benefits and risk factors. Price change between health plans of varying quality cannot be compared, and any quality adjustment methods to facilitate price comparison would be difficult and subjective. As a result, we developed an indirect approach called the retained earnings method." https://www.bls.gov/cpi/factsheets/medical-care.htm
We also have to contend with the indiscriminate firing of BLS employees which has already impacted data sampling and the potential manipulation of CPI data to bolster the current administration's false narratives. The future credibility of U.S. economic data is now being questioned.
For apartments BLS could use Zillow, apartments.com, rent.com and zumper to search same apartment complexes in each city to get estimate of large apartment complexes. Confidence rate would be pretty high with enough apartments selected. Supposedly Federal Reserve is looking at using this apartment data as a leasing indicator for price trend for next 12-18 months.
For healthcare, could use public rates on FEHB that covers 8.2 million people, which is largest in the USA and the world. But they refuse because they track health care cost directly, not insurance premiums, even though majority of people have insurance. Well, BLS does calculate health insurance separately via health care expenditure survey to thousands of families.
A basic internet search yields the following CPI Criticisms:
1. Substitution Bias: The CPI uses a fixed "basket" of goods and services to track price changes. However, it doesn't fully account for the fact that consumers often substitute cheaper alternatives when prices rise. For example, if the price of beef increases, consumers might buy more chicken instead. The CPI might not accurately reflect this shift in spending patterns.
2. Quality Improvements: The CPI may not fully capture improvements in the quality of goods and services over time. Newer products with better features may be more expensive, but their higher price might not be accurately reflected in the CPI if they are considered "new" and not yet included in the basket.
3. Changing Spending Patterns: The CPI's fixed basket also struggles to adapt to changing consumer preferences and spending habits. For instance, the rise of online shopping and the decline of brick-and-mortar retail might not be fully reflected in the CPI's calculation.
4. Volatility of Food and Energy Prices: The CPI includes volatile components like food and energy prices, which can cause significant fluctuations in the index. This makes it difficult to discern underlying inflation trends. For example, a temporary spike in oil prices can significantly impact the CPI, even if overall inflation remains relatively stable.
5. Alternative Measures: Some economists prefer the Personal Consumption Expenditures (PCE) index as a more accurate measure of inflation because it allows for more flexible adjustments to spending patterns and new goods. The GDP deflator is another alternative that considers changes in the overall economy, including new goods and services.
While the CPI is a valuable tool for tracking inflation, its limitations mean it's not a perfect measure of the cost of living or a complete representation of the inflationary experience.
Inflation: We all know what it is. We can see it in the prices of things we buy. But how do you measure / quantify it accurately? Is that even possible?
Life in the 1800s was a lot different than in the current century. Transportation : Horse & buggy / In1869 you might have traveled coast to coast by rail. Medical care: The county doctor who visited your home. Food: A lot of it home grown Entertainment: Reading by oil lamp at night. Late in the century you might have purchased an Edison “victrola” (hand-cranked) and have listened to some scratchy sounding tunes. In 1880 the first motion picture arrived.
1900 - There were a few cars now (electric mostly). In 1908 you might have been fortunate to own a Model T Ford. In 1914 the first commercial flight took place (Tampa / St. Petersburg). In 1920 United Airlines began service. Electricity in homes became a popular “must have”. It became common in urban homes in the 1930s. Rural areas lagged. Under FDR a program to install electricity in 85% of homes was completed in 1945. Autos became popular. The interstate highway system initiated under Eisenhower was built in the 1950s. Entertainment: (Commercial) AM radio first aired in 1920. WNBT NYC began broadcasting images (via television) in 1941.
2000s - What a leap in standard of living just a couple hundred years! Today - Fiber optic and satellite based broadband. The advent of commercial space tourism. Self-driving / nearly self-driving autos. Virtual reality.. Computers in our pockets. 24-hour always connected (always “breaking”) news.
The problem:How can you compute a meaningful “cost of living” tracker when what constitutes “living” itself is in such a constant state of flux?
People always needed to eat. That hasn’t changed much. You can compare the price for a pound of your favorite steak in 1800 with today I suppose. Supermarkets didn’t exist then. 60% of us lived and worked on farms. Was a pound of top-sirloin the same in 1800 as now? (flavor, freshness, packaging, availability?). A gallon of oil in 1800 oddly enough cost about $2.00. Don’t panic, however, as you’d be most likely to use only a little to light your evening lamp.
Home heating costs? Most homes in 1800 were heated by wood burning stoves or fireplaces. How to get a meaningful “heating fuel” inflation figure here when the process entailed daily back-breaking work splitting & carrying logs, Move on to 1900 when homes were largely heated by coal burning stoves or fireplaces. How to determine the “inflation factor”? Today’s n/g or electric systems ars so much cleaner, easier to operate and more reliable.
How about the cost of air travel? Is a “tourist class” seat on AA or United the same product today that it was 40-50 years ago (I say not.) Do the CPI calculations take that into consideration? Do the figures even attempt to factor in things like number of connecting flights or average number and length of delays? OTOH: One might argue that the same flight today at a higher altitude in a faster plane, over a shorter time is indeed “more product” then aboard a louder slower flight on a twin-prop 40-50 years ago. Are variances like that factored into COLA?
Cars? There is no resemblance really. How do you figure out how much car prices have “inflated” from an era (early 1900s) when you stood outside and hand-cranked the engine for a start to today’s product? Is it fair to incorporate things like air bags, A/C, run flat tires, better lighting, automatic lane keeping into the price and thereby determine cars haven’t really gotten “more expensive” because you’re just buying “more car” for the added price? It’s quality adjustments like these, that cause published inflation rates to “bite” less than what as individuals we feel in our pockets,
Maybe that’s the reason gold holds the allure for some. It is possible to compare its price over the centuries.
Comments
However, this doesn't mean that there isn't room for improvement.
Since the 1980s, "owner's equivalent rent" has been used to gauge home prices.
To obtain this data, homeowners guess how much it would cost to rent their homes.
This "dirty data" is a lagging indicator which may not accurately reflect actual housing costs.
Health insurance premiums comprise a significant part of medical spending for many consumers.
However, the BLS does not directly track health insurance premium costs.
Consequently, medical spending data tends to decrease CPI price changes.
"Even though insurance premiums are an important part of consumers’ medical spending, the BLS does not directly price health insurance policies. In a direct approach, we would track the movement of insurance premiums, holding constant the quality of insurance, and use these price relatives to build the Health Insurance index. However, the BLS has been unable to consistently control for changes in quality such as policy benefits and risk factors. Price change between health plans of varying quality cannot be compared, and any quality adjustment methods to facilitate price comparison would be difficult and subjective.
As a result, we developed an indirect approach called the retained earnings method."
https://www.bls.gov/cpi/factsheets/medical-care.htm
We also have to contend with the indiscriminate firing of BLS employees
which has already impacted data sampling and the potential manipulation
of CPI data to bolster the current administration's false narratives.
The future credibility of U.S. economic data is now being questioned.
https://www.nytimes.com/2025/08/10/opinion/stagflation-trump-economy.html?unlocked_article_code=1.dU8.7328.SqDKI87QMSKP&smid=url-share
Supposedly Federal Reserve is looking at using this apartment data as a leasing indicator for price trend for next 12-18 months.
For healthcare, could use public rates on FEHB that covers 8.2 million people, which is largest in the USA and the world. But they refuse because they track health care cost directly, not insurance premiums, even though majority of people have insurance. Well, BLS does calculate health insurance separately via health care expenditure survey to thousands of families.
1. Substitution Bias:
The CPI uses a fixed "basket" of goods and services to track price changes. However, it doesn't fully account for the fact that consumers often substitute cheaper alternatives when prices rise. For example, if the price of beef increases, consumers might buy more chicken instead. The CPI might not accurately reflect this shift in spending patterns.
2. Quality Improvements:
The CPI may not fully capture improvements in the quality of goods and services over time. Newer products with better features may be more expensive, but their higher price might not be accurately reflected in the CPI if they are considered "new" and not yet included in the basket.
3. Changing Spending Patterns:
The CPI's fixed basket also struggles to adapt to changing consumer preferences and spending habits. For instance, the rise of online shopping and the decline of brick-and-mortar retail might not be fully reflected in the CPI's calculation.
4. Volatility of Food and Energy Prices:
The CPI includes volatile components like food and energy prices, which can cause significant fluctuations in the index. This makes it difficult to discern underlying inflation trends.
For example, a temporary spike in oil prices can significantly impact the CPI, even if overall inflation remains relatively stable.
5. Alternative Measures:
Some economists prefer the Personal Consumption Expenditures (PCE) index as a more accurate measure of inflation because it allows for more flexible adjustments to spending patterns and new goods. The GDP deflator is another alternative that considers changes in the overall economy, including new goods and services.
While the CPI is a valuable tool for tracking inflation, its limitations mean it's not a perfect measure of the cost of living or a complete representation of the inflationary experience.
Inflation: We all know what it is. We can see it in the prices of things we buy. But how do you measure / quantify it accurately? Is that even possible?
Life in the 1800s was a lot different than in the current century.
Transportation : Horse & buggy / In1869 you might have traveled coast to coast by rail.
Medical care: The county doctor who visited your home.
Food: A lot of it home grown
Entertainment: Reading by oil lamp at night. Late in the century you might have purchased an Edison “victrola” (hand-cranked) and have listened to some scratchy sounding tunes. In 1880 the first motion picture arrived.
1900 - There were a few cars now (electric mostly). In 1908 you might have been fortunate to own a Model T Ford. In 1914 the first commercial flight took place (Tampa / St. Petersburg). In 1920 United Airlines began service. Electricity in homes became a popular “must have”. It became common in urban homes in the 1930s. Rural areas lagged. Under FDR a program to install electricity in 85% of homes was completed in 1945. Autos became popular. The interstate highway system initiated under Eisenhower was built in the 1950s. Entertainment: (Commercial) AM radio first aired in 1920. WNBT NYC began broadcasting images (via television) in 1941.
2000s - What a leap in standard of living just a couple hundred years! Today - Fiber optic and satellite based broadband. The advent of commercial space tourism. Self-driving / nearly self-driving autos. Virtual reality.. Computers in our pockets. 24-hour always connected (always “breaking”) news.
The problem: How can you compute a meaningful “cost of living” tracker when what constitutes “living” itself is in such a constant state of flux?
People always needed to eat. That hasn’t changed much. You can compare the price for a pound of your favorite steak in 1800 with today I suppose. Supermarkets didn’t exist then. 60% of us lived and worked on farms. Was a pound of top-sirloin the same in 1800 as now? (flavor, freshness, packaging, availability?). A gallon of oil in 1800 oddly enough cost about $2.00. Don’t panic, however, as you’d be most likely to use only a little to light your evening lamp.
Home heating costs? Most homes in 1800 were heated by wood burning stoves or fireplaces. How to get a meaningful “heating fuel” inflation figure here when the process entailed daily back-breaking work splitting & carrying logs, Move on to 1900 when homes were largely heated by coal burning stoves or fireplaces. How to determine the “inflation factor”? Today’s n/g or electric systems ars so much cleaner, easier to operate and more reliable.
How about the cost of air travel? Is a “tourist class” seat on AA or United the same product today that it was 40-50 years ago (I say not.) Do the CPI calculations take that into consideration? Do the figures even attempt to factor in things like number of connecting flights or average number and length of delays? OTOH: One might argue that the same flight today at a higher altitude in a faster plane, over a shorter time is indeed “more product” then aboard a louder slower flight on a twin-prop 40-50 years ago. Are variances like that factored into COLA?
Cars? There is no resemblance really. How do you figure out how much car prices have “inflated” from an era (early 1900s) when you stood outside and hand-cranked the engine for a start to today’s product? Is it fair to incorporate things like air bags, A/C, run flat tires, better lighting, automatic lane keeping into the price and thereby determine cars haven’t really gotten “more expensive” because you’re just buying “more car” for the added price? It’s quality adjustments like these, that cause published inflation rates to “bite” less than what as individuals we feel in our pockets,
Maybe that’s the reason gold holds the allure for some. It is possible to compare its price over the centuries.