Diego Mamani, we are experiencing slowing housing starts, slowing retail sales, lower house sales, at the same time we see higher oil and rent prices. We have inflation rising while the economy is slowing. Ben attributes the persistent inflation to rising commodity prices. He does use CPI, but relies more on PCE to gauge consumer prices, at least that’s what he told the Senate.
The CPI is definitely manipulated by the government, and the inputs and methods were changed drastically in the 1960’s or 1970’s. The CPI is useful to the government for calculating cost of living increases for entitlement programs. But to me, it does NOT reflect my increased costs. I do NOT experience 2% -3% inflation in my own life, but more like 8-10%. Calculated Risk has excellent write-ups about the flaws in this measure, mainly substitution and hedonic adjustment. I researched this a little myself, and let me give you a couple examples of why the CPI is so low, when we experience prices rising so fast.
Mamani, here are a few examples. If the price of steak goes up, the government CPI statisticians exclude steak from the meat categoy and substitute the cheaper hamburger, justifying it by saying the consumer would buy hamburger if steak is too expensive. This is “hedonic adjustment”. Read about it on the government web site. Read also what inputs they use, and the weighting attributed to each. I actually have researched it, have you?
Another example. Health insurance for a family is $600/month, about 10% of wages if you make $100K/year. For employers it is the largest cost. For GM, $1,000 of every car is for health insurance for their workers. So the health insurance premium should be 10% of CPI, but is it less than 0.1%.
Another example. Housing, which costs us 33% or more of our income has risen by 10? or more annually, so housing costs should be at least 20% of CPI (this is being conservative and assuming the average American spends 20% of income on housing). But housing costs are EXCLUDED. Instead, the CPI uses owner equivalent rents. In the last 6 years, as housing prices boomed, the owner equivalent rent went DOWN, because rents got cheaper as more people bought houses. The rent component is 40% of CPI, so the housing asset bubble lowered the CPI.
The CPI is a government number, that they try to keep low so they can minimize the cost of living increases for social security, VA benefits, and disability. It is not meant to educate us about the true cost of living. So to me, I am not sure how it would ever be useful.
About pausing: Ben said he does not want the high price of oil and commodities to feed through into permanent price increases. He wants to see productivity rise, so that higher prices don’t have to be passed along.
Thanks for your responses, and I hope nobody got bored with my explanation of the CPI.
