Misconceptions and Myths About the CPI
WASHINGTON (MarketWatch) -- The U.S. government has been understating inflation, which has led investors to misprice stocks, bonds and real estate, noted bond-fund manager Bill Gross said Thursday. The real problem is not that the government publishes dubious numbers but that investors believe them and make decisions based upon them, he said.
A recent comment on Carpe Diem: "To change the definition of CPI to erase the effects of inflation is not only disingenuous, but outright fraud."
From the recent BLS Study "Addressing Misconceptions About the Consumer Price Index" written by John Greenlees and Robert McClelland, research economists in the BLS Division of Price and Index Number Research:
A number of longstanding myths regarding the Consumer Price Index and its methods of construction continue to circulate; this article attempts to address some of the misconceptions, with an eye toward increasing public understanding of this key economic indicator.
Within the past several years, commentary on the CPI has extended well beyond the circle of economists, statisticians, and public officials. The strongest criticism of BLS methodology has not been concentrated in a single profession, academic discipline, or political group, but comes instead from an array of investment advisers, bloggers, magazine writers, and others in the popular press. Also, whereas in the past the CPI frequently was held to be overstating inflation, recent criticism has focused on supposed downward biases.
1. It is a myth that the BLS reduced the growth rate of the CPI by assuming that hamburger is substituted for steak.
2. It is a myth that the use of hedonic quality adjustment has substantially reduced the growth rate of the CPI.
3. It is a myth that the 1983 adoption of owner’s equivalent rent systematically reduced the growth rate of the CPI shelter index.
4. It is a myth that Social Security payments are updated by a CPI that does not include food or energy.
Each of the improvements made to the CPI over the years is based on sound economic theory and years of research by academicians and BLS economists. The methods continue to be reviewed by outside commissions and advisory panels, and they are widely used by statistical agencies of other nations.
Finally, the CPI is not, and can never be, a perfect index. Moreover, all of the topics raised in the recent commentary on the CPI—including the methods for dealing with consumer substitution, quality change, and owner-occupied housing—are critically important to the accuracy of the index. The very existence of the CPI methodological changes discussed here attests to the fact that the BLS must always be working to enhance the index. The BLS benefits from the work of academics and others who identify ways in which the CPI can be improved. The BLS also benefits when the public understands how the CPI is constructed and what the index’s strengths and limitations are. It is hoped that this article will help increase that public understanding.