The Consumer Price Index, a big lie


What is the "real" CPI or cost of living? Is the CPI extraordinarily understated?

Average inflation rate per the CPI (2002-2004) is 3.3% per the chart below



Item Average inflation per year, 2002-2004 Data
Housing 14%+ Median US house 2002 = $158,000. Mid 2005 $240,000. (source = US Census and OFHEO data)(see hedonics in the glossary)
Food 7%+
15% - 2006-7		 The agricultural price index (all farm products) has moved from 95 to 120, about 26% per here
Also ask yourself how much more you're paying for dining out (for the exact same meal) than a few years ago..
7/2007: 23% food price in last 18 months per the IMF
Health care 9.5% "Total national health expenditures increased by 7.7 percent in 2003...In 2004, employer health insurance premiums increased by 11.2 percent" (source). The Health Care Index is also up over 80% in the two year period ending in August of 2005. Health insurance costs doubled since 2000.

See a health care popup chart here, click here for regular link.
See a premiums/benefits popup chart here, click here for regular link.
An early 2007 Washington Post article here.
A mid 2007 article about very large price increases here and here.
Education 5%+ College education has gone up 5-6% per year since mid '90s per here. 2005 - Increases in tuition, fees, room and board by the schools ranged from 4.3 percent at Ithaca, N.Y.-based Cornell University, which will charge $41,767, to 5.5 percent at Yale University…, which will cost $41,000… Harvard… raised its rate by 4.5 percent to $41,675. “The University of Colorado’s board of regents approved a 28 percent tuition increase for the 2006 fiscal year", the Denver Post reported.
Gasoline 20%+ Wholesale unleaded gas without any taxes in 2002 was about $.75 per gallon average. Late 2004 - $1.40.
Taxes -1% Tax freedom day remained about the same per the Tax Foundation.
New Cars 2.3% Per Edmunds's data, the increase from 2003-2004 was 2.3%.
"Other" -10%+ Many consumer items that are infrequent purchases like computers, clothing, DVD players & microwaves have gone down in price. But one doesn't buy them every week or month, and they are not essentials like food, housing, etc.
What is this on the inflation "core rate" which excludes food and energy too? Does someone seriously think that a broad price index should not include daily use items like food and energy? We fail to see any purpose for the concentration on it other than political and similar ones. If the concern is truly erratic changes in food and energy, just use a simple moving average.

Note that there are no factors for quality changes, either up or down, so add or subtract your own adjustments as desired.

Does that look like an average of 3.3%, like the CPI states, to you?

We maintain that it has been severely understated for years, by at least half.
In other words, we think it has been at least 6.6% (not 3.3%) during the 2002-4 period. See the adjustment table below to see our best estimate for correction factors.



Actual Consumer Price Index from the U.S. government



Some final notes: All we're saying here is that inflation is roughly at least 3% higher than what is being reported and has been reported since when the Boskin Commission Report recommendations were implemented. For our predictions and thoughts on future inflation, please see our forecast and other pages.

Longer term CPI accuracy is also far from accurate. From mid 1955 to mid 2005, CPI has risen slightly over 7 times. During that same period, houses have gone up over 18 times and even Disneyland admission has risen over 15 times.

Lastly and stated again, we think the inflation rate that has been reported and emphasized called "core inflation" is more than a little ridiculous. It's basically the CPI rate after food and energy price changes have been removed - last time we looked, we pay for them every day... and are tempted to make a very sarcastic comment.

Update May 2006, from the government bureau that publishes the CPI (BLS)
Furniture sales were up 9.1%, Electronics 7.2%, Building Materials 14.4%, Food & Beverage 6.1%, Health & Personal Care 7.6%, Gasoline Stations 23.6%, Clothing 6.7%, Sporting Goods 9.3%, General Merchandise 8.5%, and Eating & Drinking Establishments 7.9%.


Click here for a chart of CPI components from 1978-2004, showing the different rises and falls in college tuition to TVs.

Click here for a chart showing changes in US household net worth from 1952-2006, both in raw dollars and then adjusted for CPI plus lies, and here for a closeup of the 1990-2006 period. Notice that the inflation corrected figures are actually multipled by 5 (they're actually 1/5 of what is shown) in order to have them show as other than an almost flat line. As an aside and per the US Census, the average household in 2006 is composed of 2.7 persons.


Estimated CPI adjustment factors to bring it back to reflecting reality

Amount, cumulative As of date Source data A more conservative amount
+1.0% 1982 Homeowner's equivalent rent, BLS +1.0%
+1.5% 1993 Hedonics, BLS +1.5%
+2.5% 1997 Boskin Commission Report results +2.5%
+3.5% 2001 Hedonics, BLS +3.0%
+4.0% 2004 Hedonics, BLS +3.0%
+4.5% 2005 Hedonics, BLS +3.5%
+5.0% 2006 Hedonics, BLS +4.0%
+6-6.5% 2007 Hedonics, BLS +4.5%

The definition of hedonics in our glossary contains essential material to help understanding of the CPI lies.

Credit and kudos to John Williams at Shadow Statistics

VERY highly recommended. Here is his inflation chart, which even shows higher rates than ours.
Note that we are not using Mr. Williams full adjustments (as of 1/2007, his "CPI" level was around 500 where ours was around 340... and the actual BLS CPI-U was 202). Note also that all Mr. Williams is actually doing with his adjustments is to make the CPI consistent over time by using the same formulas, etc, as were used in 1982. In other words, its comparing apples to apples and ignoring the changes that have been made since 1982.




Two pictures of the composition of the Consumer Price Index

Note that the government CPI does not include taxes, yet another major problem with it.




10/2007 weights & data



Source of CPI-U data as of late 2005 - here and here.



The Finster Dollar Index
US dollar value changes (and therefore global inflation) in terms of global real goods, services, capital and labor.


The Consumer Price Index
From a series called "Government economic reports: Things you've suspected but were afraid to ask".


Smoothing out inflation
A very good treatment of specific problems with the CPI and how it is calculated.


Japan's fuzzy math and the German scare tactics
CPI lies are not limited to just the U.S.


Inflation - Who says it's dead?
A look back to the 1950s & before showing some causes and much larger inflation than many are aware of



On 3 January 2006, the all items index (in US dollar terms) was 18.5% higher. The food index rose by 13.4%, while the all industrials index, which comprises nonfood agriculturals and metals sub-indexes, was up by 24.4%. The Nfa index increased by 15.6%, while the metals index rose by 28.5%.
(The Economist, 7 January 2006, p. 89).