finance blog

CPI Really Stands for…

Ostensibly, the CPI stands for Consumer Price Index. I have a few alternate suggestions:

  • Contrived Price Index
  • Controversial Price Index
  • Captive Price Index

There are several thing that I don’t like about the CPI, specifically the CPI-U (The Consumer Price Index for All Urban Consumers).   Most troublesome, is that it is used interchangeably with the term “inflation” or “US inflation”.  While CPI-U includes food, energy, and medical expenses, for example, it does so in ways that are far removed from the way many consumers purchase.

For me, the CPI-U appears to understate the inflation I’ve seen in the last 10 years.  The price of my satellite/cable TV has doubled.  The share of health-care insurance that comes out of my paycheck has gone from $20/month to $200/month.  I still remember getting a Big Mac value meal for $2.99, but now it’s about $5.00. It’s hard to believe that consumer inflation has averaged just 2.3% annually over that time period.

That’s why I’m glad other folks are developing their own price indexes.  Two examples are the Billion Prices Project Index, and the upcoming Google price index.

I’ve read a number of articles saying CPI-U understates inflation by about 1.0-1.5% annually.  If so, this is  a big deal.  Real interest rates are not only negative they are substantially negative.  And real GDP growth is dramatically overstated.

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