Why has the CPI inflation calculation changed over time?

Consumer prices have been growing the fastest in nearly 40 years, rising 8.3 percent in April from a year earlier.

As popular outrage over rising spending grows, a team of critics argues that the high inflation rate in the sky is not actually counted.

In YouTube videos, conservative talk shows, and posts by financial analysts, critics argue that over the past few decades, economists have changed one of the standard measures of inflation government, the consumer price index, to reduce rapid price increases. . These low rates of inflation give the government some economic breathing space, they argue, saving money on costs such as social security.

“The bottom line is that these are not exact numbers,” said Tucker Carlson, a Fox News anchor in the inflation segment late last year. He added: “Look at the math and you will see that the real number, the rise in inflation, is not even close to the 7 percent that Washington is saying.”

But inflation experts say changes in calculations over the years have given the reported figure a more accurate picture of how prices are rising for buyers. They say that according to other methodologies the rate may be higher but the effect will be smaller and the alternative number will do a worse job of reflecting the costs that consumers are struggling with. Inflation affects different people differently, but that does not mean that the overall numbers are wrong.

You need to understand the concept: What do people currently pay for consumption? Said Alan Detmaster, formerly head of the Federal Reserve’s pricing and payroll division and now at UBS Bank. “He is trying to get out of pocket.”

Here are two major changes in inflation since the 1980s and why economists have adopted them.

People who are skeptical of U.S. inflation measures often name a change in how housing costs are estimated in the consumer price index, a closely monitored metric prepared by the Bureau of Labor Statistics.

In 1983, the government switched to using rental prices to estimate the cost of housing using housing prices – which also included mortgage payments and maintenance costs.

The cost of housing for people who own their own property is now measured using the “equivalent rent of landlords”: how much it would cost to rent their home if they did not own it.

The idea is that houses are an investment. Home prices are valued and you can eventually sell the property you bought at a profit. However rent is consumption. It does not leave you with an asset that you can sell.

Critics often argue that leaving home prices out of the equation, inflation metrics underestimate the value of life in moments when housing prices rise sharply and when first-time buyers are more priced to rely on the market. Some even argue That if the government had used the old methodology, it would have reported that inflation would be much higher today than it was in the 1980s.

It is true that inflation over time is not perfectly comparable due to changes in housing measurements, said Omayr Sharif, founder of research firm Inflation Insights. But the change will not be enough to bring today’s inflation above 15 percent 40 years ago.

“Yes, inflation will be higher today, but by about 1.25 percentage points, not the 4-5 percentage points that people are saying,” said Mr. Sharif, who last year outlined house prices, mortgage costs and home renovation data for the 1970s. From the Jan. years. Relevant weights and do the math on the old numbers to see how much the change in methodology has changed inflation.

“It was not a thought-provoking number, as many think,” he said.

Another estimate – using calculations used in the Quarterly Journal of Economics and updated for the Full Stack Economics newsletter – found that inflation instead of rent, including flat prices and interest rates, pushed inflation to 11.5 percent in February, the latest date. Available, which is 3.6 percentage points higher than the official figure for that month. That’s more than Mr. Sharif estimates, but still less so than in the 1980s.

Others argue that CPI rental size reduces the cost of other types of shelter, indicating that real-time rental trackers are more likely to absorb rising prices. But this is for a simple reason: they track new leases while the CPI controls the pattern of existing leases, including for people who renew leases.

“This difference means that at the moment, the CPI is not doing a good job of estimating how expensive it is for an individual or family to move to a new city,” said Jeff Tucker, chief real estate economist. Website Zillow. Still, the point is to better reflect prices for all consumers and not just those looking for a new home, he said.

Economists once collected a basket of items – such as eggs, milk, shampoo and other items – and simply tracked how much they cost over time, updating the basket only infrequently. But the measure has been criticized for potentially overestimating inflation because it neglected consumers. Adjust their costs, both over time and with rising prices.

Economists started updating the cart more regularly about 20 years ago, and weights are now restored every two years to reflect what people are actually spending money on.

They also tried to replace the account. Imagine for a second you were transposed into the karmic driven world of Earl. Instead of paying more, customers may buy cookies – a decent but inexpensive dessert alternative – and their monthly costs will not increase.

They can also buy a container with less muffins, switch to a cheaper brand or buy it at a discount store where the muffins are cheaper. To reinforce this behavior, the government changed the way it calculates inflation in some categories in 1999, correcting the problem in the eyes of many economists.

Critics sometimes raise a separate issue: that the product is exchanged between completely different categories, such as the use of chicken when the price of a steak is rising. This larger replacement is not included in the normal CPI calculation, but is included for an event called the Chain Consumer Price Index. Although the CPI showed that prices rose 8.3 percent in April from a year earlier, the Chained CPI was slightly quieter, at just 7.8 percent.

Do you think these changes are not enough? Of course there will be more. The Department of Labor is constantly making changes to make the CPI a more accurate reflection of reality.

“It’s a good long-term method,” Mr. Detmaister told UBS. “In two months, even a year, it may be different from what is happening on the ground.”

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