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The CPI Understates Inflation And Skews Expectations

Bruce Wilds profile picture
Bruce Wilds

The Importance Of How the CPI Is Figured Is Massive

Consumer inflation has been estimated since the 1700s by measuring price changes in a fixed-weight basket of goods. This method was seen as effectively measuring the cost of maintaining a constant standard of living. In the last 30 years, a growing gap has become obvious between government reporting of inflation, as measured by the consumer price index (CPI), and the perceptions of actual inflation held by the general public. Informal evidence and occasional surveys have indicated that the general public believes inflation is running well above official reporting, and that public perceptions tend to mirror the inflation experience that once was reflected in the government's formal CPI reporting. The government is able to understate inflation by using methodologies based on the concept of a "constant level of satisfaction" that evolved during the first half of the 20th century in academia.

The numbers the government pumps out today are the result of changes made in the 1990s when political Washington moved to change the nature of the CPI. The contention was that the CPI overstated inflation by not allowing for the substitution of less-expensive hamburger for more expensive steak. This extended into the BLS re-weightings sales outlets such as discount or mass merchandisers with Main Street shops. Those promoting the change claim it is simply another way to measure inflation and it still reflects the true cost of living. Politicians and the financial media touted the benefits of a "more accurate" CPI that would allow for the substitution of goods and services. This was viewed as a way to reduce the cost of living adjustments for government payments to Social Security recipients, etc. The fact is that by moving to a substitution-based index and weakening other constant-standard-of-living ties have muddied the water as to just how much we are being

This article was written by

Bruce Wilds profile picture
Bruce Wilds is an independent businessman and licensed general contractor that owns real estate in the Midwest, his holdings include apartments, retail space, and office complexes. He has invested in several businesses and traded both commodities and stocks for several decades. Wilds considers himself well anchored to reality and the economy as he maintains, designs, and leases buildings. His work has made him keenly aware of rapidly changing lifestyles and trends in new business formation. The not for profit blog he maintains incorporates many of the experiences and knowledge garnered from his hands-on business style, extensive travels, and studies of history, politics and economics. Bruce Wilds is also the author of the book "Advancing Time", the book focuses on how the ever quickening pace of change impacts today’s society and the massive challenges it creates. He feels that it is crucial we understand that we are living in a unique era the likes never before experienced by past generations. History viewed in the framework of mans time on earth forms the crux of this somewhat radical perspective. Journeys from the beginning of man to our current state helps us make sense of our fast changing chaotic world. Advancing Time illuminates the responsibilities society faces. Used as a tool Wilds wrote it with the hope it would help clarifies the choices before mankind, guiding and giving hope to those who want to have a positive impact.

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