Saturday, April 16, 2011

Persistent Myths and Misconceptions About the CPI

From the 2008 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."


Conclusions from the paper about four CPI myths:  

1. It is a myth that the BLS reduced the growth rate of the CPI by assuming that hamburger is substituted for steak - it must be stated unequivocally that the BLS does not assume that consumers substitute hamburger for steak.

2. It is a myth that the use of hedonic quality adjustment has substantially reduced the growth rate of the CPI.  This myth represents a fundamental misunderstanding of the hedonic method, and it ignores the fact that the introduction of all hedonic quality adjustments since 1999 has had only a very small impact on the overall 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.


On another note about general consumer confusion about inflation based on their frequent purchases of gas and food and infrequent purchases of most other components of the CPI:

"Many consumers feel that their personal inflation experiences are not reflected in the movements of the CPI-U. These experiences can actually be borne out because some consumers spend more than others on items with rapidly increasing prices. The CPI-U is constructed from expenditures averaged over many consumers; as a consequence, some consumers will face a lower rate of inflation than that indicated by the CPI-U, and others will face a higher rate of inflation.

Another reason for the potential difference between the CPI-U and a consumer’s experience of inflation is that the prices of many frequently purchased items, especially necessities such as food and gasoline, recently have been rising more rapidly than the CPI as a whole. Because theCPI is an average of the inflation rates of many different items, if some prices are growing more rapidly than the CPI, then other prices must be growing more slowly."

The BLS quotes David Leonhardt in the NY Times: "Price increases are simply more noticeable—more salient, as psychologists would say—than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago."

(MP: To use a more recent example, how many consumers have noticed that eggs are 7.5% cheaper than a year ago?)
 
Conclusion from the BLS: "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."  

MP: I believe that the BLS is conscientiously and objectively performing a very difficult and challenging job of calculating a consumer price index, despite conspiracy claims that the government is engaged in politically-motivated distortions of the CPI to either over-state or under-state "real" inflation to meet some political goals or objectives.  And compared to other countries around the world, I would suggest that the CPI calculated in the U.S. is probably the "gold standard" in terms of its reliability, consistency, transparency and its lack of politically-motivated distortions.   

27 Comments:

At 4/16/2011 1:25 PM, Blogger Benjamin said...

Kudos to Dr. Perry.

At different times in our history, both lefties and righties, and compete zanies, have tried to monkey with, or discredit the CPI.

My own guess is that the CPI overstates inflation a little bit, as consumers and businesses are constantly migrating to better product or prices, and that cut-price deals in the underground economy are not captured. The emergence of "Dollar Stores" must also present challenges to the BLS team.

Currently, we are watching unit-labor costs decline, while housing affordability is at an all-time high. This is simply not consistent with strong inflation.

I sense the Inflation Chicken Littles are really just Republican mouthpieces mau-mauing inflation. Very peculiar is the commentary of some economists who gushed about Japan's successful use of QE in 2006, but are now saying that QE is terrible and inflationary in the USA.

The right-wing wants Obama to fail (patriotism stops at the party line). I am no Obama fan--if a vote today were held, I would vote for Paul Ryan.

That said, I want America to prosper. no matter who is President. I sense we are moving into a sustained bull market, and the Great Bush Recession-Financial Collapse will recede into the past.

Yes, Obama will look like a winner by 2012, and will probably easily be re-elected.

And if the economy is growing nicely, I don't care.

 
At 4/16/2011 1:57 PM, Blogger Paul said...

Benji,

Was "mau mau" the word of the week on your toilet paper thesaurus roll?

"The right-wing wants Obama to fail (patriotism stops at the party line)."

He has already failed massively, idiot. His wrecking ball policies are only in play because fools like you fell in love in 2008 with the official candidate of People Magazine. Your only solution is literally to paper over his many fiascos with monopoly money.

"I am no Obama fan--if a vote today were held, I would vote for Paul Ryan."

The Ryan fling will be over soon. You'll be back with your boyfriend in 2012 to help him finish off our country once and for all.

 
At 4/16/2011 2:37 PM, Blogger Benjamin said...

Paul-
Why, I am taken aback by the vulgar and truculent nature of your post. It reflects a lack of circumspection unbecoming to you.

 
At 4/16/2011 2:53 PM, Blogger PeakTrader said...

Yes, anyone who believes inflation is understated is ignorant.

Not all government agencies are the same. The BLS is "Top Gun."

However, if Americans knew the true costs of government services, they would want much fewer of them.

Americans see the government benefits. Yet, they don't see the much higher costs, e.g. fewer goods & services, higher prices, higher interest rates, and more taxes.

And they don't see how the market economy creates more value for less costs, e.g. through fewer inputs, less time, less effort, etc. resulting in more goods & services, lower prices, lower interest rates, and less taxes.

Fortunately, for the government, Americans are ignorant.

 
At 4/16/2011 3:13 PM, Blogger Paul said...

Benji,

Aww, are you "mau mauing" for sympathy? You throw out your baiting comments, don't be surprised when someone tells you to kiss their ass.

Go back to your boyfriend already, you're more at home with his band of jerkoffs.

 
At 4/16/2011 3:52 PM, Blogger AIG said...

Very nice, and totally agree.

However, it must be pointed out that VangelV found that SPAM prices had increased considerably over the past 2 years, thus totally disproving the lies and manipulation of government statist statisticians. ;) And lets not even get into the cheddar cheese inflation and packaging manipulations :)

I'd like to see these statist liers try and address these points!

 
At 4/16/2011 5:15 PM, Blogger Benjamin said...

Paul-

Why, I am just floored by these low-brow, greasy pool-room type comments on a nice economic blog.
Is this really reflective of your intellect and character?

 
At 4/16/2011 5:41 PM, Blogger Paul said...

Benji,

Any man who voted for Obama should not be questioning the intellect and patriotism of others.

Mau mau. Mau mau. Mau mau.

 
At 4/16/2011 7:15 PM, Blogger Bernie Ecch said...

So now that Dr Perry accepts the government's statement that they are telling us the truth about prices, will he also accept their statements on why were need high speed rail instead of buses with wifi, why the medallion system is the best way for taxi service and why we can't have food jitneys?

How about talking to some people in the private sector who feel the statistics are manipulated, like investor Jim Rogers or John Williams of the shadow stats website. Or how about reviving why CBS Evening News in the mid 70s did for several year: Send a crew out in four cities to have them buy items that totaled $100 in the first episode and see what they cost today. That should tell us if the fall in oranges compensates for the rise in meat prices.

 
At 4/16/2011 7:19 PM, Blogger Bernie Ecch said...

So now that Dr Perry accepts the government saying their statistics are accurate, will he accept them when they say no to food jitneys, yes to high speed rails, licensing of urban farmers and taxi cab medallions?

How about talking to John Williams of the shadow stats website and find out why he thinks the BLS stats have been monkeyed with over the last 30 years by both parties? The government doesn't have any incentive to lie, do they? After all they can save money on on COLA and stay in office if they tell voters not to believe their eyes.

 
At 4/16/2011 7:19 PM, Blogger Bernie Ecch said...

So now that Dr Perry accepts the government saying their statistics are accurate, will he accept them when they say no to food jitneys, yes to high speed rails, licensing of urban farmers and taxi cab medallions?

How about talking to John Williams of the shadow stats website and find out why he thinks the BLS stats have been monkeyed with over the last 30 years by both parties? The government doesn't have any incentive to lie, do they? After all they can save money on on COLA and stay in office if they tell voters not to believe their eyes.

 
At 4/16/2011 7:25 PM, Blogger Hydra said...

However, if Americans knew the true costs of government services, they would want much fewer of them.

=================================

I see you can now get a "receipt" for your taxes, showing what you bought. The averag taxpayer pays something like $18 for the FBI.

Would you rather have $18, or the FBI?

 
At 4/16/2011 7:35 PM, Blogger Benjamin said...

Housing affordability is at an all-time high. But if someone buys a house today, they do not rave about the positives of deflation. In fact, they don't even notice inflation or deflation--probably they credit themselves with getting a good deal.

There is a lot of amateur-hour sleuthing, and crackpot analysis of the CPI--but credible economists, both left and right-wing, have vetted the methodology.

No methodology is perfect; you can split fine hairs when it comes to the CPI.

I can tell you my cell phone is worth triple my old land lines, and I paid $200 a month in the old days, for multiple lines. Now I pay $50 a mont all-inclusive domestic, and I can send photos by my phone, and talk to Thailand for 1.2 cents per minute.

Let's see--what does an e-mail costs compared to snail mail? That's a 100 percent permanent decrease.

And downloading or renting from Netflix vs. car, gas and $24 tix to se a movie? (And $5 hot dogs).

How about buying used books on Amazon.com for $3, and having them delivered?

How about sourcing through Craigslist, which has lowered the price of placing a classified ad by 100 percent (vs. $40 to $80 for the Los Angeels Times).

You guys just do not have your thinking caps on. Mouthing repeats of what you heard from some braying ass on talk radio is fun, but does not contribute much to this conversation.

 
At 4/16/2011 7:37 PM, Blogger AIG said...

"Fortunately, for the government, Americans are ignorant."

While I am pessimistic and disappointed somewhat, having been born and having lived in a number of other countries before, I can safely say that Americans are several orders of magnitude less "ignorant" when it comes to their government than people elsewhere. This may reflect on the conditions on the people elsewhere more than it reflects on the American people; but we still have a way to go before becoming Europeanized.

"So now that Dr Perry accepts the government saying their statistics are accurate"

Its not a matter of "believing government" or not. Some of you "libertarians" need to lay off the ideological kool-aid, and look at things on merit. 1+1=2, regardless if its the government adding it up, or you.

 
At 4/16/2011 8:05 PM, Blogger PeakTrader said...

Hydra, anyone with philosophy degrees, e.g. in economics (neoclassical economics evolved as a branch of moral philosophy and marxism evolved as a branch of social philosophy, for example) can see your statement is almost as ignorant as Bernie Ecch.

Some government agencies are better than others. So, $18 for the FBI (I'm assuming a year instead of a day) may be worth it, although the total costs for the FBI are much higher (for reasons I stated above).

How about something like Social Security? Someone works for 30, 40, or 50 years and pays over 7% of his income, while his employer also pays over 7% of your income, for Social Security.

If you invested the 15% or so in a private individual account, then after 30, 40, or 50 years, you'd receive a monthly check many times higher than the Social Security check you'll receive from the government.

Investment = saving, except if you're the government. Then investment = spending, not saving.

We can't privatize Social Security, because the government needs as many young workers as possible to pay for the existing retired population.

We know the money has already been "invested." However, we also know a huge part of it has also been wasted.

 
At 4/16/2011 9:50 PM, Blogger James said...

"It is a myth that the 1983 adoption of owner’s equivalent rent systematically reduced the growth rate of the CPI shelter index."

Get Real! Watch this and decide for yourself

 
At 4/16/2011 11:00 PM, Blogger PeakTrader said...

Fortunately, the BLS provides more complete and accurate information by including other factors, e.g. quality improvements (new home construction and home improvements), changes in interest rates, property taxes, insurance, etc.

Yet, some believe the BLS data overstate OER:

A shrinking number of jobs and a growing supply of apartments will continue to push the Puget Sound region's rents down next year as vacancy rates climb, industry experts predict.

Job losses killed our market, and development buried it," Mike Scott, of Dupre & Scott Apartment Advisors, told landlords at an industry conference Tuesday.

To attract renters, landlords have lowered rents, and six out of 10 are offering concessions worth an average $757, according to the firm's research.

New York City Landlord Chimes In

Based on what I'm experiencing, I'd say that rents are down 10 to perhaps as high as 20% from their peaks.

 
At 4/16/2011 11:17 PM, Blogger PeakTrader said...

When home prices were rising sharply, housing affordability was generally flat.

Also, although homeowners were extracting home equity, a large proportion of that equity was used for home improvements, and related household goods.

Boomers spending big on remodeling
SF Gate
January 23, 2005

America's homeowners have seen their home equity grow by a mind- numbing $5 trillion since 1995, thanks to a 70 percent average jump in the value of their houses.

...according to new research, have been liquefying part of their equity and plowing it back into their homes at a dizzying pace -- nearly one-quarter of a trillion dollars of home improvements a year.

Those home improvement investments, in turn, usually help pump up the value of the homes even further.

 
At 4/17/2011 12:14 PM, Blogger juandos said...

"Would you rather have $18, or the FBI?"...

Well as completely useless as the FBI is, I opt for my $18 back...

Still the FBI is hardly the biggest government waste project going though...

Consider all the extorted tax dollars wasted on something that can't be found in the Constitution, 'entitlements'...

 
At 4/17/2011 12:37 PM, Blogger juandos said...

Thanks James for that video link...

 
At 4/17/2011 2:07 PM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 4/17/2011 3:23 PM, Blogger geoih said...

"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."

How is it a "sound economic theory" to aggregate the prices, of multiple heterogeneous products, set by the subjective utility and demand of millions of individuals? How is any measurement, that is by definition always variable, and without any constant relationship, considered scientific?

The CPI is just another meaningless metric of macro-economics that only gives the illusion of knowledge.

 
At 4/17/2011 3:59 PM, Blogger PeakTrader said...

The true change in the CPI may not be achieved. However, improving the estimate for a more accurate estimate can be achieved.

Can the change in the standard of living for the median American between one year and another be measured? Maybe not. Yet, that change exists.

 
At 4/17/2011 8:57 PM, Blogger Ron H. said...

"Can the change in the standard of living for the median American between one year and another be measured? Maybe not. Yet, that change exists."

Well, maybe not, if, as some assert, "The rich get richer, and the poor get poorer." Mr. Median Man may not change his standard of living year to year. :-)

 
At 4/17/2011 9:15 PM, Blogger Ron H. said...

Paul

"Was "mau mau" the word of the week on your toilet paper thesaurus roll?"

Benji is trying to describe a technique used by politicians when they discuss inflation. As with most political speech, it makes no sense, and usually sounds something like
this

 
At 4/19/2011 3:30 PM, Blogger VangelV said...

Not all government agencies are the same. The BLS is "Top Gun."

Nonsense. The BLS is a mouthpiece for the government and does what it is told. It is easy not to see inflation when you are not looking at reality.

 
At 4/19/2011 3:34 PM, Blogger VangelV said...

I'd like to see these statist liers try and address these points!

The claims in the 2008 study have already been dealt with. The fact that you are unaware of the games that have been played only shows your ignorance of reality. And the last time I looked, the statists support the BLS lies, not expose them.

 

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