Consumer Price Index (CPI) Fails to Reflect Real-World Inflation

Consumer Price Index and Its Shortcomings

The Consumer Price Index (CPI), which is supposed to reflect the inflation rate, is failing to capture the real-world situation of surging prices. It excludes several significant costs that households are currently facing, such as property taxes and the skyrocketing interest payments.

Discrepancy in Inflation Data

Despite the fact that price levels are much higher than before the pandemic, the CPI suggests that inflation has slowed, showing a 2.4% increase for the year ending in September. However, this is only part of the story. Steve Reed, a BLS economist, explains that the CPI only captures the cost of goods and services purchased for consumption, leaving out other factors that affect the cost of living. For instance, interest charges on rising consumer debt, which currently stands at around $628 billion with an average interest rate of about 22%, are largely absent from the CPI.

Exclusion of Everyday Costs

Pete Earle, economist at the American Institute for Economic Research, states that these excluded costs are impacting how people spend money. He adds that while it may not be inflation per se, it should definitely be taken into account. Another significant omission in the CPI is property-related expenses. While it does measure the cost of personal property insurance, it does not account for the cost of insuring the physical home. This is a critical oversight, especially as climate-related risks are driving premiums higher.

Exclusion of Significant Items from CPI's "Basket"

The CPI’s "basket" also leaves out several items that have become significant in Americans’ budgets, including restaurant tips. Additionally, legal but selectively regulated goods, such as marijuana in some states, and gambling expenses are not accounted for. This adds to the perception that official inflation metrics do not fully capture the true cost of living for many Americans.

Alternative Inflation Measures

The Bureau of Labor Statistics (BLS) acknowledges the shortcomings of the CPI, stating on its website that it does not necessarily measure individual experiences with price change. Other pricing challenges are not unique to the CPI. The personal consumption expenditures price index, produced by the Bureau of Economic Analysis, also has some quirks when it comes to measuring certain expenses like health care.

Reality of Inflation for Americans

While inflation may appear to be slowing down according to official data, the financial reality for Americans is more complex. It is influenced by costs that extend beyond the basket of goods traditionally tracked by federal data.

Bottom Line

Inflation is a complex issue and the current metrics used to measure it, such as the CPI, may not fully reflect the real-world situation faced by consumers. It's clear that the current inflation measures have significant gaps and do not fully capture the everyday costs faced by Americans. What are your thoughts on this? Do you believe the CPI accurately reflects your cost of living? Share this article with your friends and let us know your views. Don't forget to sign up for the Daily Briefing which is available every day at 6pm.