Why Has the CPI Inflation Calculation Changed Over Time?

Consumer prices are rising at the fastest clip in nearly 40 years, rising 8.3 percent in April from a year earlier.

As public outrage about rising spending grows, a group of critics are arguing that sky-high inflation figures are indeed low.

In YouTube videos, conservative talk shows, and posts by financial analysts, critics argue that over the past few decades, economists have changed the consumer price index, one of the government’s standard measures of inflation, to understand how fast prices are rising. . Those low inflation figures give the government some economic leeway, they claim, saving money on expenses such as social security.

“The bottom line is that these aren’t exact numbers,” Fox News host Tucker Carlson said during a segment on inflation late last year. He added, “Do the math and you’ll see that real numbers, rising inflation, are not even close to what Washington is claiming at 7 percent.”

But inflation experts say changes in calculations over the years have made reporting rates more accurate snapshots of how much prices are rising for shoppers. They say the rate under the different method may be higher, but the effect will be less, and the alternative number will do a weaker job of reflecting the costs that consumers have been grappling with. Inflation affects different people differently, but that does not mean that overall statistics are wrong.

“You have to understand the concept: what do people currently pay for consumption?” Allan Datmeister, who previously headed the price and wages department at the Federal Reserve, said the bank is now at UBS. “She’s trying to get out of pocket expenses.”

There have been two major changes in inflation since the 1980’s and why economists have adopted them.

Those who are skeptical of US inflation measures often cite changes in how consumer prices are measured in the Consumer Price Index, a metric produced by the Bureau of Labor Statistics.

In 1983, the government stopped using rental prices to measure housing prices – including mortgage payments and maintenance costs.

The cost of housing for those who own their property is now measured using what is known as “owners’ equivalent rent”: how much it will cost to rent their home if they do not own it.

The idea is that homes are an investment. Home values ​​are valued, and you can eventually sell the property you bought for a profit. Rent, however, represents consumption. It does not leave you with a property that you can sell on the street.

Critics often argue that by leaving home prices out of the equation, inflation metrics underestimate the value of life in moments when home prices are rising significantly and when it costs first time buyers more to set foot in the market. Some even make claims If the government used the old method, its recorded inflation rate would be much higher today than it was in the 1980s.

Omer Sharif, founder of research firm Inflation Insights, said it is true that inflation is not entirely comparable over time due to changes in how housing is measured. But that change is not enough to make today’s inflation rate higher than about 15 percent 40 years ago.

“Yes, inflation will be high today, but about 1.25 percentage points, not what people say is 4 to 5 percentage points,” he said. Sharif, who drew data on home prices, mortgage costs and home repairs since the 1970s last year, applied the relative weights, and calculated the old figures to see how the change in pattern changed inflation.

“It simply came to our notice then.

Another estimate – using calculations used in The Quarterly Journal of Economics paper and updated newsletter for full-stack economics – found that including house prices and interest rates instead of rent, inflation would have pushed to 11.5 percent in February, the latest date available. , Up 3.6 percent from the official figure for the month. He is more than Mr. Sharif’s estimate, however, is still lower than in the 1980s.

Others argue that the CPI’s rent measure underestimates the value of other types of shelter, indicating that real-time rent trackers tend to catch up on rising prices more quickly. But for a simple reason: they track new leases, while CPI tracks existing rental samples, including those renewing their leases.

Jeff Tucker, a senior real estate economist, said: “This difference means that at the moment, the CPI can’t do a good job of telling the story of how expensive it is for an individual or a family to secure a residence in a new city.” Website Zillow. The point, however, is to better reflect what the price looks like for all consumers, not just those looking for a new home, he said.

Economists once collected a basket of items – such as eggs, milk, shampoo and other items – and tracked their value over time, barely updating the basket. But the move was criticized for potentially overestimating inflation because it ignored consumers. Adjust their costs both over time and as prices rise.

Economists began updating the basket more regularly about 20 years ago, and weights are now reset every two years to reflect what people actually spend their money on.

They also tried to account for substitutes. Imagine that the price of a cupcake has gone up in a month. Instead of paying more, the customer can buy cookies instead – a decent but cheap dessert option – and their monthly expenses will not increase.

They can also buy containers with fewer cupcakes, switch to cheaper brands or shop at discount stores where cupcakes are cheaper. For its factor, the government tweaked 1999 on how to calculate inflation in certain categories, correcting the problem in the eyes of many economists.

Critics sometimes raise a different point: the product is exchanged between completely different categories, such as using chicken when the price of a stick increases. It does not include large substitutes in the general CPI calculation, but for a measure known as the Chained Consumer Price Index. While the CPI showed a rise of 8.3 per cent in April a year ago, the linked CPI was a bit more muted, at just 7.8 per cent.

Think these changes are not enough? There will definitely be more. The Department of Labor is still making changes to try to make the CPI a more accurate reflection of reality.

“It’s a good long-term approach,” Mr. Said Detmeister at UBS. “Over a period of two months, even over a year, it may be different from what is happening on the ground.”

Similar Posts

Leave a Reply

Your email address will not be published.