CPI Hoax: How the Feds Mask Inflation

Like many government statistics, the Consumer Price Index, has been manipulated by the bureaucrats to render it inaccurate at best and misleading at worst.  Once CPI was a proxy measurement of inflation, but today it is disconnected from the actual price increases experienced by consumers.

According to the Bureau of Labor, the index is supposed to be "a measure of the average change over time in the prices paid by urban consumers for a market basket of goods and services."  If that sounds like government gobbledygook, it is.  Simply put, the CPI is supposed to measure the cost of living.

Over the past 30 years, the BLS has altered the formula it uses to calculate the CPI at least 20 times.  As part of the new methodology devised by the bureau, the cost of food and energy have been deemphasized in determining the cost of living metric.

What makes this diabolical is those two components are among the most volatile. As every consumer knows, spikes in food and energy prices can leave the family budget in tatters.  Yet in its infinite wisdom, the BLS no longer includes the full impact of these items in the index.

To understand the issue, it helps to know how the bureau collects and analyzes the data.  The government uses samples from urban areas to collect price data.  About 15,000 families nationwide are selected to participate in a point-of-purchase survey to learn what goods and services are being bought.

Once the data is organized, the bureau picks more than 200 items and weights them according to how many and how often the products and services were purchased.  Over time, the methodology has changed to put less emphasis on food and fuel prices used to calculate the cost of living.

What would motivate the BLS to make such a move?  The answer can be found in the way the federal government uses the CPI.  For example, Social Security payments are tied to inflation.  So are benefits for retired military personnel, disabled veterans and federal government pensioners.

As the cost of living increases, these payments and benefits are supposed to be adjusted upward.  But that's only in theory.  The problem is that the current methodology engineered by government bureaucrats understates real inflation, negating the need to increase payments to vets and others.

Stagnant inflation helps reduce the impact on the federal budget.  But in real terms it hurts seniors and military veterans because their payments have less purchasing power and their benefits do not keep up with the mounting cost of medical care.

The Federal Reserve Bank also uses inflation as a key ingredient in determining monetary policy.  Its stated goal is to keep inflation at two percent or less over the long run.  One reason the Fed has kept interest rates low is because inflation has remained tepid.

However, the Fed uses a more reliable inflation tool.  Instead of the CPI, it looks to another gauge, the Personal Consumption Expenditures Price Index or PCE.  The measurement uses business surveys, rather than less reliable consumer surveys.  The formula also adjusts for changes in consumer behavior.

Interest rates effect every American.  When interest rates are low, saving money is less attractive, borrowing is cheaper and consumer spending usually rises.  Conversely, when interest rates spike, savers earn more on deposits and borrowing becomes expensive, which discourages spending.

There are also political reasons for the government to tinker with the CPI.  Rising inflation numbers never reflect well on the administration in power.  It most likely cost President Jimmy Carter a second term. When he left office in 1981, inflation stood at a whopping 10.3 percent.

With today's oil prices temporarily in free fall, conventional wisdom says inflation is low.  However, spiraling food costs continue to take a larger chunk out of family budgets.  Food prices in the United States climbed nearly seven percent last year.  That's inflation under any definition.

Even as food prices zoomed during the last 12 months, the official inflation rate averaged 1.6 percent for 2014 as measured by the CPI. That underscores the disassociation between the government index and the cost of living experienced by most Americans.

To address the situation, Congress should demand that the bureaucrats in the BLS include the full impact of food and gasoline prices in calculating the cost of living.   It is no longer acceptable to let unaccountable federal workers tamper with a critical measurement that impacts many Americans.