[quote=livinincali][quote=CA renter]
Yes. BTW, are you using nominal CPI numbers (I haven’t fact-checked your numbers)? If so, the way they calculate CPI means that the inflation number here is understated, too.
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Isn’t CPI nominal by definition. It’s just an index that measures what the BLS thinks inflation is. Certainly it’s flawed/understated based on the typical house hold budget. It certainly misses asset price bubbles. Your led to 2 conclusions when the fed says they didn’t see the bubbles. Either they are too dumb to look outside of CPI or they are lying.[/quote]
You’re right, I worded that incorrectly. What I meant is that the way they calculate CPI has changed over time, and understates inflation today (IMO). In other words, if they were using the same metrics today as they were 30-40 years ago, what would these numbers look like?
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The Controversy
Originally, the CPI was determined by comparing the price of a fixed basket of goods and services in two different periods. Determined as such, the CPI was a cost of goods index (COGI). However, over time, the U.S. Congress embraced the view that the CPI should reflect changes in the cost to maintain a constant standard of living. Consequently, the CPI has been moving toward becoming a cost of living index (COLI).
Over the years, the methodology used to calculate the CPI has also undergone numerous revisions. According to the BLS, the changes removed biases that caused the CPI to overstate the inflation rate. The new methodology takes into account changes in the quality of goods and substitution. Substitution, the change in purchases by consumers in response to price changes, changes the relative weighting of the goods in the basket. The overall result tends to be a lower CPI. However, critics view the methodological changes and the switch from a COGI to a COLI focus as a purposeful manipulation that allows the U.S. government to report a lower CPI.
John Williams, a U.S. economist, described his view of this manipulation when he was interviewed in early 2006. Williams prefers a CPI, or inflation measure, calculated using the original methodology based on a basket of goods having quantities and qualities fixed.
