February 24, 2011

3 Myths About the Governments Inflation Measure, or Consumer Price Index CPI

There seems to be a lot of people out there who think that the inflation index is something between inaccurate to outright propaganda.   Two common beliefs about the inflation index are discussed here.

Myth #1 : The government doesn't count food or gasoline in the inflation numbers.

False.   The main CPI measure includes gasoline and food.   Its easy to verify.   Just take a look at the January 2011 news release for the CPI-U.   It says :

"Increases in indexes for energy commodities and for food accounted for over two thirds of the all items increase. The indexes for gasoline and fuel oil both increased in January, continuing their recent strong upward trend. The index for food at home posted its largest increase in over two years with all six major grocery store food group indexes rising."
Its pretty obvious that the CPI inflation measure includes gasoline and food.   Some people may be confused because there is an alternate measure that excludes gasoline and food but it is clearly labeled as such as "All items less food and energy".   The primary inflation figure cited is the core CPI that does include food & gasoline.

Myth #2 : When the price of steak goes up the government assumes we buy ground beef instead so they just switch the more expensive steak for hamburger or chicken or tree bark.

False.   The government does not substitute between items in different CPI categories.   They only assume that substitution occurs between items in the same category.   Hamburger and steak are not similar enough to be in the same category.   They might however assume that we would substitute rib eye for filet mignon or flank steak as those are in the steak category.  Furthermore they don't automatically assume you substitute downwards to lesser goods.  Sometimes they assume you will substitute upwards for example if flank steak goes up enough in price then some people will move up to more expensive filet mignon.

Myth #3 : I spent 8% more on health insurance, my cable TV went up 12%, tooth floss doubled, and Levis jeans are $5 more this year than last year but the government said inflation was just 3.5% so the government is lying about inflation.

False.   The CPI is an average measure of inflation across all consumer goods.    Your individual experiences and spending behavior will not match the national average perfectly.   e.g. If gasoline goes up then this will impact taxi drivers significantly more than people who don't own cars.  

You can read more about the Common Misconceptions about the Consumer Price Index: Questions and Answers at the BLS.gov site.

[edit May 25 : removed reference to 'core CPI'.]

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