By Matthew Hougan
Regarding the CPI, yes, I did a big write-up on it in the January 2005 issue of the Journal of Indexes. My article was called "CPI Two-Step," and it's one of the better pieces I've done. You can find it here.
The thing about the CPI is that it's easy to brush off the inconsistencies. The government uses a higher weight for cigarettes than prescription drugs. Ha Ha.
But the CPI is hugely important. In fact, it's the single most important index in America.
The government uses the CPI to make cost-of-living adjustments to Social Security, military pensions, federal pensions, food stamps, school lunches, tax brackets, TIP payouts and more. The difference of 0.5% one way or the other is measured in the billions of dollars.
Take healthcare. Healthcare represents 6% of the CPI, yet makes up 16% of our GDP. Riddle me that. And according to the National Coalition on Health Care, healthcare costs jumped 6.9% in 2007—more than twice the official rate of inflation. If you tripled the weight of healthcare in the CPI, bringing it even with reality, that alone would have a major impact on the final CPI.
Look at it another way: I'm 31 years old. Assuming it still exists, I'll get my first Social Security payment in 37 years. Let's suppose that the CPI runs 3% per year until then, but it understates "real" inflation by 1% a year. Whammo-presto, my check is worth 29% less in today's dollars. If the CPI understates inflation by 2%, my check loses 50% of its value.
I better increase my contribution to the 401(k) plan...