Price Index Poor Way to Measure Inflation
by

The economic data the government publishes ad nauseum always seems so exact. Reports might claim the Gross Domestic Product grew 2.1 percent during the first quarter or that producer prices declined 0.7 percent.

Those figures always look so darn official. Who's going to argue with numbers rounded to a tenth of a percent? I will.

I don't care how many digits the so-called experts have in their statistics. Anyone with even a vague understanding of how they're  collected knows the numbers are questionable. That's why it's so refreshing to know that finally, one of those official statistics, the Consumer Price Index (CPI) is coming under serious scrutiny.

Right now, the CPI is our most commonly used measure of inflation. Every month, hoards of number-crunchers calculate the prices of 71,000 goods and services at 22,000 outlets in 88 regions around the country. Statisticians also gather housing data from 1,000 homeowners and 5,000 renters.

For the sake of argument, let's assume that every single one of these prices is diligently tracked and accurately recorded by energetic trustworthy public workers. All this so-called precise information then gets plugged into a computer, and the final figure is supposed to give us a reasonably accurate picture of how much consumer prices have increased in one month. But that's all it tells us.

Things started to get ugly the CPI was turned into some kind of magical number that could measure how much the cost of living had increased. Labor groups use it to negotiate wage contracts. The IRS uses it to adjust tax tables. And Congress uses the CPI to determine the annual increases entitlement spending programs like Medicare and Social Security will receive. Rising prices, however, and the cost of living are two completely different things.

In the real world, away from 'official' numbers, if the price of pears goes up, most of us will buy apples instead. Because of substitution, the increase in the price of pears is almost irrelevant. The CPI, which rigidly tracks the same item month after month, doesn't take this very normal consumer behavior into account.

Another reason the CPI is a lousy measure of the cost of living is the fact that it hasn't fully factored in our penchant for shopping at large discount chains like Sam's Club, Staples, or Circuit City.

The CPI also doesn't allow for changes in quality. It compares the price of a computer from 15 years ago with the price of a computer today. Sorry folks, but there's no comparison between those two pieces of equipment.

The current CPI doesn't count new products that have made their way into the market like DVD players, mini satellite dishes and MP3 players. (More FAQ's about the CPI)

Of course, none of this is new information. It's just no one paid any attention to it until some smarty pants realized that a flawed CPI was an answer to prayer. No longer would our spineless Congressmen and women have to take the heat for cutting a dime of that precious Social Security or Medicare bloat.

By adjusting the CPI downward, Congress can use math to eliminate about $1 trillion worth of spending over the next dozen years. This would reduce our run-away entitlement spending, and Congress could blame everything on an obscure statistical miscalculation. It's pure genius.

Recalibrating the CPI, however, won't change the fact that it's a lousy way to measure changes in the cost of living. Whether or not the adjustment is made, the only way we'll ever get federal spending under control is to go line by line through the budget and eliminate all programs that can't justify their existence. That takes time, effort and guts--three things Congress always seems to be lacking.

© Copyright Deborah A. Ayers 1997. All rights reserved.