Posted on January 1, 2019
The Consumer Price Index is an index maintained by the U.S. Bureau of Labor Statistics that claims to measure the prices of a basket of goods and services over time. When the index was first created that is indeed what it did. However, the numerous revisions since its creation has changed the index to combine attributes of price changes with assumptions of consumer behavior. The CPI is now effectively a behavioral index that no longer focuses primarily on price changes over time.
Inflation on the other hand is roughly defined as the rate of increases in prices for a basket of goods and services over time. Inflation sounds very similar to CPI but don’t be fooled.
Why the CPI Doesn’t Track Inflation
The Consumer Price Index is used synonymously with rate of inflation. In fact, the CPI is often the underlying measurement for many inflation-linked investments or liabilities. Treasury Inflation Protection Securities are treasuries that increase the principle of a bond based on increases in the CPI. Similarly, Social Security payments are increased annually based on increases in the CPI.
Now that we know the CPI doesn’t accurately track inflation we can then raise the question as to why. The answer is simple: to depress the reported inflation in order to lower current and future liabilities that are tied to inflation.
Social security spending is a great example. In 2017 the government paid out $942 billion which represented 28% of the federal tax revenue. Social security revenues increase with taxable wages whereas social security expenses increase with the CPI-W. In 2017, social security revenues increased by 3.3% while the CPI-W increased a meager 0.3%.
You may be tempted to think this type of structure benefits the public since limiting government liabilities benefits the tax payer. However, it is neither honest nor right to recipients of such programs to have them bear the brunt of government spending problems (and we will all be recipients one day). If cost of living adjustment are supposed to track cost of living, then payments should be based on actual cost of living and not made-up numbers.
The use of the CPI is an attempt to hide the real problem: the government is spending too much and not taxing enough.
Inflation Index Alternatives
If you are interested in knowing alternative inflation measurements check out these two alternative indices:
Showdowstats – One of the most popular methods for measuring inflation, Shadowstats attempts to calculate inflation by using the same CPI methodologies in place since 1980. Not surprisingly their inflation rate is higher than the CPI.
Everyday Price Index (EPI) - The EPI measures price changes people see in everyday purchases such as groceries, restaurant meals, gasoline, and utilities. The index uses more frequently purchased items as opposed to less frequent big ticket purchases. The EPI is also tracking higher inflation figures than the CPI.