Why Do You Say the Consumer Price Index (CPI) Understates Inflation?
When the mainstream media and government officials discuss "inflation," they generally talk about it in terms of the Consumer Price Index (CPI). This is government number that tracks the general rise and fall of consumer prices in the economy.
There are a couple of significant problems with this metric.
In the first place, the CPI doesn't measure "inflation." Inflation properly defined is an increase in the money supply. Rising consumer prices is one symptom of inflation, but it is not in and-of-itself inflation.
Setting aside the issues with using the CPI as the definition of inflation, the metric itself is deeply flawed and understates the extent of price increases in the economy.
The Bureau of Labor Statistics (BLS) calculates CPI by analyzing the price of a “basket of goods.” Obviously, the things the government chooses to put in that basket have a big impact on the final CPI number.
Under the current formula, 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service, etc.)
Again, the things the government includes and excludes from the basket can make a profound difference in that final CPI number.
Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics admitted the changes were “sweeping.”
According to the BLS, periodic changes to the CPI calculation are necessary because “consumers change their preferences or new products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it.”
In 1998, the BLS followed the recommendations of the Boskin Commission, a committee appointed by the Senate in 1995. Initially called the “Advisory Commission to Study the Consumer Price Index,” its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation — by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this “issue" by ensuring the formula consistently spits out a smaller number.
In effect, the government cooked the books.
That's not the only way the BLS can manipulate CPI data. It built in all kinds of geometric weighting, substitution and hedonics into the calculation. By manipulating the numbers in the formula, the government can basically create an index that outputs whatever it wants.
If you run today's price data through the old formula, you will find that the CPI is nearly double the number the government reports. So, when the Bureau of Labor Statistics reported a 9.2% CPI in June 2021, it was closer to 18% when calculated using the 1970s formula.
You can find alternate CPI charts at ShadowStats.com.
Why would the government do this?
Because it wants to hide the true extent of the inflation it creates by borrowing and spending and printing money.