CPI Calculation Hides Inflation
I've been meaning to figure out how the CPI (Consumer Price Index) hides inflation for years now, and finally got around to looking at the components. It's not a secret or a government conspiracy, it comes down to a question of what the CPI is built to measure. The answer appears to be that the CPI was built to measure how the average American consumes, and the year-over-year increase in those consumption costs. I have full faith in the BLS (Bureau of Labor Statistics) that they are doing a good job measuring this increase. The problem is, it has very little to do with inflation.
By measuring out-of-pocket expense, the CPI ignores the role of financing and debt in the American economy. The CPI is telling us that housing costs (the rent equivalence figure for people who own homes) rise not at the same rate of housing prices, but at the same rate as mortgage payments. In a narrow technical sense, this is correct. The cost of housing to the average American in any given year is the cost of financing and maintaining the home. But since when is inflation supposed to represent the financed cost of goods?
I like referring to the BLS inflation calculator which can report that a 1994 dollar buys $1.36 in 2006. Too bad that housing costs 100% more today than it did 12 years ago, but thanks to relatively low interest rates and creative mortgage financing, the CPI doesn't see it.
It makes me feel a little dumb to think how I've been sure for a decade that inflation was being hidden by cheap imports, the deflationary hypothesis of the global market, but it turns out inflation is underestimated through measuring the average American's out-of-pocket cost for goods and services, rather than their actual cost. So the CPI gives the medical component a weight of less than 6% in the average American's budget when it was already at 16% of the GDP in 2004! But Americans who actually purchased their own health care paid an average cost of $11,500 in 2006, when the median family income was $43,200. So health care costs for a family are running at 25% of the median family income, and have risen over 60% in the last five years, but the CPI reports medical care at less than 6% of the average American's expenses? They aren't measuring inflation at all, they're measuring household budgets.
By measuring out-of-pocket expense, the CPI ignores the role of financing and debt in the American economy. The CPI is telling us that housing costs (the rent equivalence figure for people who own homes) rise not at the same rate of housing prices, but at the same rate as mortgage payments. In a narrow technical sense, this is correct. The cost of housing to the average American in any given year is the cost of financing and maintaining the home. But since when is inflation supposed to represent the financed cost of goods?
I like referring to the BLS inflation calculator which can report that a 1994 dollar buys $1.36 in 2006. Too bad that housing costs 100% more today than it did 12 years ago, but thanks to relatively low interest rates and creative mortgage financing, the CPI doesn't see it.
It makes me feel a little dumb to think how I've been sure for a decade that inflation was being hidden by cheap imports, the deflationary hypothesis of the global market, but it turns out inflation is underestimated through measuring the average American's out-of-pocket cost for goods and services, rather than their actual cost. So the CPI gives the medical component a weight of less than 6% in the average American's budget when it was already at 16% of the GDP in 2004! But Americans who actually purchased their own health care paid an average cost of $11,500 in 2006, when the median family income was $43,200. So health care costs for a family are running at 25% of the median family income, and have risen over 60% in the last five years, but the CPI reports medical care at less than 6% of the average American's expenses? They aren't measuring inflation at all, they're measuring household budgets.
posted by Morris Rosenthal | 10:16 AM
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