It's Time To Ditch The Consumer Price Index (CPI)

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

So why does the government maintain such a transparently inaccurate and misleading metric? For three reasons.

That the official rate of inflation doesn't reflect reality is obvious to anyone paying college tuition and healthcare out of pocket. The debate over the accuracy of the official consumer price index (CPI) and personal consumption expenditures (PCE--the so-called core rate of inflation) has raged for years, with no resolution in sight.

The CPI calculates inflation based on the prices of a basket of goods and services that are adjusted by hedonics, i.e. improvements that are not reflected in the price of the goods. Housing costs are largely calculated on equivalent rent, i.e. what homeowners reckon they would pay if they were renting their house.

The CPI attempts to measure the relative weight of each component:

Many argue that these weightings skew the CPI lower, as do hedonic adjustments. The motivation for this skew is transparent: since the government increases Social Security benefits and Federal employees' pay annually to keep up with inflation (the cost of living allowance or COLA), a low rate of inflation keeps these increases modest.

Over time, an artificially low CPI/COLA lowers government expenditures (and deficits, provided tax revenues rise at rates above official inflation).

Those claiming the weighting is accurate face a blizzard of legitimate questions. For example, if healthcare is 18% of the U.S. GDP, i.e. 18 cents of every dollar goes to healthcare, then how can a mere 7% wedge of the CPI devoted to healthcare be remotely accurate?

In my analysis, the debate over inflation is intrinsically flawed. What really matters is not the overall rate of inflation, which can be endlessly debated, but the purchasing power of earned income, i.e. wages and the exposure to real-world costs.

In other words, those households with zero exposure to college tuition and the full costs of daycare, medical care and healthcare insurance may well experience low inflation, while the household paying the full costs of daycare, college tuition and healthcare insurance will experience soaring inflation.

Here's one example of how CPI fails to capture real-world inflation/loss of purchasing power. Let's say an employee works for a company or agency that pays his/her healthcare insurance. The monthly cost has risen from $1,000/month to $1,500/month. The employee's wage has remained stagnant but the total compensation costs paid by the employer have gone up by $500/month.

Now the employer shifts that $500/month to the employee as their share of the healthcare insurance cost. Since the average full-time worker earns around $40,000 a year, and pays around 18% in taxes, their take-home pay is around $33,000 annually.

The employee's co-pay of $6,000 a year ($500/month) represents 18% of their take-home wage. This is an 18% reduction in earnings, or the equivalent of 18% inflation (i.e. a reduction in purchasing power).

This shifting of the skyrocketing burden of healthcare costs acts the same as 20% inflation, yet it doesn't even register in the current CPI.

The geography of inflation doesn't register, either. Soaring rents in Brooklyn, NY and the San Francisco Bay Area have a profound effect on those exposed to these rapidly rising costs, yet these impacts are massaged to zero by national CPI calculations.

So once again we have a bifurcated society: those protected by the state from rising costs and those exposed to real-world reductions in purchasing power.Households that receive government subsidies and direct payments have little exposure to real-world healthcare costs, since they are covered by Medicaid, and modest exposure to housing if they receive Section 8 benefits (Section 8 recipients pay 30% of their income for rent, regardless of the market price of the rental). Retirees on Medicare also have limited exposure to the real-world costs of their care paid by the government.

If we analyze inflation by these two metrics, we find the middle class is increasingly exposed to skyrocketing real-world prices. Pundits in the top 5% have the luxury of pontificating on the accuracy of the CPI while those protected by government subsidies and coverage have the luxury of wondering what all the fuss is about. Only those 100% exposed to the real costs experience the full fury of actual inflation.

So why does the government maintain such a transparently inaccurate and misleading metric? For three reasons: 1) it is useful propaganda; 2) it suppresses the state's cost-of-living increases and 3) it lowers the government's cost of borrowing. The benefits of reducing COLA adjustments are self-evident, as is the benefit of borrowing money at low rates of interest, but the propaganda benefits are more subtle.

The key to enabling the endless printing of money that enriches the banks and the top .1% is low inflation. Asset bubbles can be inflated, ballooning the wealth of the owners of the assets, as long as inflation is near-zero.

Indeed, the Federal Reserve claims it must print money to counter low inflation.
Meanwhile, in the real economy, those exposed to the real costs of college tuition, healthcare, childcare, etc. are seeing their purchasing power evaporate like a puddle of water in Death Valley. The Fed needs low inflation to justify its continuing enrichment of the financial elite, and the Federal government needs low inflation to keep its COLAs and borrowing costs low.

There are two ways to mask real-world reductions of purchasing power: 1) skew the CPI by distorting the component percentages, hedonics and how costs are measured, and 2) protect enough of the populace from real-world increases so they no longer care. Seniors, who famously vote in droves, have no idea what their Medicare benefits actually cost. As a result, they have no experience of healthcare inflation /reduction of purchasing power.

This works in all sorts of industries. As I have often mentioned here, the F-35 Lightning fighter aircraft costs in excess of $200 million each, roughly four times the cost of the F-18F it replaces. This extraordinary inflation is not experienced directly by the taxpayer who is paying for the boondoggle, as the Federal government borrows trillions of dollars to pay for such boondoggles, effectively passing the inflated costs on to future generations.

These costs are hidden by the low cost of borrowing trillions to pay for boondoggles. If real-world inflation is (say) 5%, then interest rates would typically adjust to a few points above that rate, to compensate capital for the erosion of purchasing power. If the Treasury had to pay 7% to borrow money, the interest cost would soon cripple Federal spending. People would be forced to focus on how all those trillions of dollars are being spent, and to whose benefit.

But with borrowing costs so low, nobody cares.

The solution? One, abolish the Fed and let the market discover interest rates, and two, abandon the simplistic notion that one number of inflation has any meaning in a complex economy with numerous subsets of exposure to market costs and the loss or gain of purchasing power.

Will we muster the will to look past failed models and metrics? Sadly, the answer is no. Why?

As I noted yesterday in What's the Difference Between Fascism, Communism and Crony-Capitalism? Nothinga system set up to enrich political and financial elites is incapable of reform. the only way the CPI will ever be replaced is when the Status Quo collapses in a heap of lies and insolvency. Until then, propaganda and gaming the system to protect vested interests will rule.

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drendebe10's picture

The sheeple love being lied to... why would they want to do that????

TeamDepends's picture

4)  They think it's frickin' hilarious!

NotApplicable's picture

Silly CHS. There is only one solution.


lordylord's picture

Inflation is the most devious tax of all (paraphrasing from the great Ron Paul).  END THE FED.

Dark_Horse's picture

They need CPI because it's the lie to distract you, while they wring out the value of your dollars.


maskone909's picture

EDUCATION makes up a pretty small chunk of the pie considering over a trillion in outstanding student loans.  i would say that education is about 40% higher than the chart is showing

mophead's picture

"What really matters is not the overall rate of inflation, which can be endlessly debated, but the purchasing power of earned income, i.e. wages and the exposure to real-world costs."

Some one finally FOCKING get's it.

cynicalskeptic's picture


They've been getting it for some time - government stats calculated they were BEFORE all the politicized meddling.  This all started when St. Ronnie realized it was easier to lie about things than actually improve them.  EVERY administration since then and BOTH political parties are complicit in the lies understating inflation (currently closer to 5-6% looking at Shadowstats - though even that seems low) and minimizing unemployment (24% - WORSE than the 1932 peak of the Great Depression).

Understating inflation reduces government payouts and overstates real growth - what's not for government to love about that?

All I know is that a rib roast is now over $50, hot dogs are $4, fuel oil is well over $4 and my local property taxes have more than tripled in 25 years.  The car I would have paid $3500 for when I got out of college is now $30,000  and the house my grandparents paid $12,000 for in 1948 and that my parents paid $29,000 for in 1969 would now cost over $500,000 (even after the drop from 2007).  The salary that was best in my engineering degree in the late 70's wouldn't pay for a H.S. grad receptionist today. Speaking of which - ONE YEAR of college for my kids costs MORE than I paid for my engineering degree from a top private college.

Aussie V's picture

This is meant to be a serious question!

Can any of you tell me if I'm wrong here?? In Australia the housing market has gone through the roof. Young couples have NO WAY of buying a house on a double income. When I was 28 and earning a single wage with 3 young kids we could afford a modest house in the city, even a decent house in a regional area. SOme regional areas are like paradise here anyway, so that's not an issue.

But, now, 28 years later the price of homes has inflated SO MUCH that it's near impossible for 'normal couples'. The main reason is speculators. There are some who will go out and borrow for one house, rent it and borrow for a second house, rent it and so on until they may end up with 10-15 houses while borrowing 95% of the costs.

Because of guarranteed inflation of house prices they think they can make a fortune within 10-15 years. Some do, some don't.

But my question is this....I think that speculators should be limited to a small % because they drive the prices up and force the majority to be renters for their entire life. If houses were viewed as 'homes' and speculators were 'encouraged or forced' to invest in other areas the median home prices would become within reach of most families.

I realise there needs to be a % of speculators to provide enough homes for some people who can never afford a home but, when there are toooo many speculators it ruins it for every normal family.

I also realise that we live in a time where the term "family" is taboo and old fashioned and it's use even discouraged here. The reason for that as I see it, is to make the destruction of the traditional family unit as 'normal'. If you think the US is heading towards socialism, believe me we're soaking in it! The Communist Manifesto is alive and well here in Oz.

So, am I wrong? Should the Govt discourage people using houses as an investment or should banks demand a deposit of 10 - 15% as it used to be??

Parrotile's picture

In the distant past of "Responsible Lending" your deposit would be at least 20%. Responsible lending = effective price control.

Nowadays, "Investors" ae actively encouraged to use "equity" in their already overpriced homes as a "deposit" on the new acquisition.

The Aussie obsession with housing is still very much alive and kicking - I know at least a few colleagues who "buy" an extra home every year, to augment their "rental asset base".  They particularly like the ability to rent to the Armed Forces - good rent payers - but the property must be new (or almost new).

Malinvestment in an overpriced (enormously overpriced by any reasonable metric) and completely non-productive asset class. Winder how this is going to end (especially with China easing off on resource purchases!)

NidStyles's picture

I think you should just not worry about it and get ready for that system to collapse. 

CheapBastard's picture

The CPI, Criminal Price Index, should be abandoned.

... or at least link people's COLA to something else, like Reality !

tonyw's picture

The question is why do you think it is so important to buy? Is it because of "...Because of guarranteed inflation of house prices..." well they're not guaranteed, only death and taxes are guaranteed. If somebody buys a house to rent then the number of houses neither deccreases nor increases, in fact the number of houses available to rent increases - this should lead to a decrease in rents based on supply and demand.

The population is increasing so there needs to be an increase in the housing stock to maintain equilibrium. If this is not happening then you should ask why not, are housebuilding "speculators"/developers being prevented from building these very attractive investments by planning laws, have you run out of suitable land?

Aussie V's picture

That's a confusing and convoluted post. Hard to get my point across with that.

If a renatal house is rented you say that is 1 extra house for rent whereas I see it as 1 less available for rent.

You say house prices increasing are not guarranteed. In th etrue sense they're not however, a house that sold for 80,000 in 1988 is selling for 1.1 million today with no improvements. Also, if th epopulation increases the price of homes will increase as well. So, what is your arguement??

One tidbit I DID pick up was "Why is it important to buy?"

1. I want to live in a house not be inspected every 3 months!

2. I don't want to pay off someone else's Mortgage and hate paying dead money

3. I hate having to move every 6 months on the whim of the owner deciding to sell.

I actually own my own home but this was my experience 25 years back. Renting has it's place but, generally with a family, is a very poor existence and one is made to feel as a lesser class of person for the above reasons.

Greenskeeper_Carl's picture

The sheeple have no idea what CPI means. And if they hear about it, it will be from some tenured academic or .gov apparatchik that explains it in a way favorable to the establishment. And they take the facial with a big smile and ask for seconds. There is no way that they will change anything, when it would destroy the financial status quo. The gov and fed couldn't get away with printing all that money if the average perso realized inflation was running at 6-8% a year, while their wages were stagnant. Gold would finally re recognized, the dollar would be dumped, and the gov would have to massively increase the amounts they pay out for social security each year, hastening the collapse. Meanwhile, all military and gov workers would demand the same. So no, the CPI is hear to stay, unless we start demanding change. The status quo will continue doing everything in its power to keep people dumb, and so far it's working for the most part

Four chan's picture

perfectly stated.


food and fuel are the true cpi, 

MisterMousePotato's picture

Personally, I would put housing even before fuel, and insist that property taxes are included when evaluating housing.

lordylord's picture

Let's be honest.  Even the target inflation rate of 2% is criminal and will drain your wealth over the course of your life. END THE FED.

Bryan's picture

That reminds me of a Bible verse:


"For the time will come when people will not put up with sound doctrine. Instead, to suit their own desires, they will gather around them a great number of teachers to say what their itching ears want to hear."

lordylord's picture

Here is another for you:  "Render therefore unto Caesar the things which are Caesar's; and unto God the things that are God's".

Stop using dollars.  Use God given gold and silver.

tonyw's picture

it shows ther have always been people who can see through the bread and circuses whilst teh sheeple want maor!

Reaper's picture

When you chose to believe the lie, you don't have to think or act. Hope and trust in your shepherds is the easy way to sleep well tonight. Baa.

DoChenRollingBearing's picture

Only someone schooled in .gov statistics (John Williams) could make sense of what we have now.

And what would we get if .gov makes a new index?  Mmm?  

It would likely be at least as distorted as what we have now.

shovelhead's picture


We prefer the term hedonically adjusted.

NoDebt's picture

CPI also doesn't take into account rising TAXES.  

Wages aren't just flat, they're DOWN, in terms of what you take home.  Then with what's left you can pay for those increasingly costly goods and services.

NotApplicable's picture

Thanks for reminding me that I gotta pay the RE taxes on 'my' property. The fun part is walking through their new million dollar courtyard to get there (which was for a renovation of the last screwed up multi-million dollar renovation a few years back).

At least now, they've got a nice place to hold the tax lien auctions.


sixsigma cygnusatratus's picture

CPI: Another barbarous relic shot to hell!

oklaboy's picture

the same 1910 mercury dime buys the same amount of gas today.

Tall Tom's picture

"Mercury" Dimes were not minted until 1916, the 1916-D being a Key Date and amongst the most valuable.

The Barber Dime was in use in 1910.


And just where are you getting 43 Times Face Value??? (A gallon of Gas costs $4.30 in San Diego, CA, USA)


Do not tell me that Gasoline was selling for $0.43/Gallon in 1910 because it was NOT. It was about a Dime per Gallon. It was the Volatile Garbage off of the Barrel of Oil. That is why the Internal Combustion Engine was burn off the Garbage from Cracking.


Junk Silver right now is at 12.75 times Face Value.


Gasoline is much more expensive due to restricted supply and associated Transportation Taxes than it was in 1910.


lordylord's picture

Junk silver is ~16x face. 

MrBoompi's picture

There is no restricted supply of gasoline.

hairball48's picture

Not really. Mercury dimes weren't minted until 1916, but we take your point :)

pods's picture

CPI is working exactly how they want it to.

Just wish anytime someone equated low CPI to "no inflation" their head would explode.

World would be a much nicer place.


hairball48's picture

An honest CPI would require government to be "honest".

Pardon me if I don't hold my breath on that happening.

AdvancingTime's picture

 The modern economy that has evolved over the last several decades is loaded with interwoven contracts reeking of contagion. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Never before has mankind diverted such a large percentage of wealth into intangible products or goods.  I contend this is the primary reason that inflation has not become a major economic issue. Like many people I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas. It is important to remember that debts can go unpaid and promises be left unfilled. More on how we have sowed the seeds for inflation to suddenly strike in the article below.

kchrisc's picture

It's time to ditch the CPI's creators and manipulators and the thieving banksters that make a CPI necessary in the first place.


"My guillotine will do it."

Strider52's picture

Last year, Top Sirloin used to go on sale for $2.49 a pound. This year? On Sale at $6.99 a pound.

kchrisc's picture

According to the propaganda media you are:

1) A liar


2) Should be happy that the economy is back and booming.

Quantum Nucleonics's picture

Beyond the price difference is a steep decline in quality.  To borrow your example, beef of the same quality at the $2.49 price point now goes for $15.99.  The 6.99 stuff you're buying used to go to Mickey D's and dog food.

hairball48's picture

I can remember that when I got out of the USN in mid 70's "hamburger" being 3 pounds/dollar. Around here it's $4.99/pound give/take.

Jam Akin's picture

The pink slime content might be somewhat higher today as well....

Agstacker's picture

Pink slime with a side of soylent green, making my mouth water :)

CHX's picture

Clown Pricing Index

TalkToLind's picture

Respect the CPI, bitchez.  There is no inflation!

Pay no attention to the bearded woman behind the printing press.

abatis's picture

Sure it is all screwed up, but I think in some areas the author overstates the real inflation. For instance on the $6000 medical deductible that is only a hit if you have medical expenses for that amount. I would guess the majority of healthy insured Americans rarely would hit the $6K in a normal year and thus loose that purchasing power. It is some % of the $6K but not all of it for everyone.

BeanusCountus's picture

You are right, not every year will someone reach that co-insurance maximum out of pocket. But nowadays, it is more often than you would believe. Its only a matter of time until it happens to all. No one can avoid medical expenses long term. Everyone gets sick, whether you lead a healthy lifestyle or not. And chronic conditions hit the number every year.

We will be raising employee max out of pockets this year from effectively zero to around $1,750 per family member. And I expect many will feel the direct impact.

ebworthen's picture

If Brian Williams on the Nightly News says that inflation is low - it is.

People will go to the store, pay 25% more for something, pay increased insurance premiums and deductibles, but "there is no inflation problem".

The official government lies and MSM propaganda are designed to persuade and control; to make people complacent and obedient and to keep them from talking about real problems amongst each other.

NotApplicable's picture

Why inflation is so low, I can fit $100 worth of groceries in a single bag!