YEREVAN (CoinChapter.com) – Inflation is a fall in the purchasing value of money and a subsequent rise in prices. However, measuring inflation is no easy task. There are several ways to gauge inflation rates, and the Consumer Price Index (CPI), used by the US government, is one of them. However, some believe that the CPI is a lie and that the officials mask the dire economic situation by using an inadequate tool.
So, why is CPI bad? Is CPI a terrible measurement of inflation, and what other methods are there? Let’s dive in.
CPI vs PCE vs GDP per capita
As mentioned, there are different ways to measure inflation. The CPI, measured and issued by the Bureau of Labor Statistics, is one of them. But various government agencies also use the Personal Consumption Expenditures Price Index (PCE) from the Bureau of Economic Analysis or the Gross Domestic Product (GDP) per capita. It is essential to understand the difference between them first.
What is the CPI, and why is the CPI bad?
The primary CPI (CPI-U) is designed to measure price changes faced by urban consumers, who represent 93% of the U.S. population. Analysts construct the CPI each month based on 80,000 items in a fixed basket of goods and services representing what Americans buy in their everyday lives.
The items include gasoline at the pump, apples at the grocery store, cable TV fees, and doctor visits. In short, the CPI takes into account everything essential for an average consumer’s life, allegedly accurately.
To be more precise in their measurements, the government uses the Consumer Expenditures Survey to select those 80,000 items. For example, if people buy more beef than oysters, the price change of beef would have a more fundamental impact on the CPI results.
The methodology used to calculate the CPI has changed over time, undergoing numerous revisions. However, some critics of the CPI say that this measurement can be purposely manipulated by the U.S. government. Let’s put a pin in that, as the manipulation factor will become increasingly important once we discuss all other inflation measures available.
Notably, the CPI only includes the out-of-pocket costs for consumers, not including medical care and other insurance policies. This is where the PCE comes in.
What is PCE, and how is it different from CPI
The personal consumption expenditures price index (PCE) from the Bureau of Economic Analysis also uses data on prices from BLS. However, the PCE price index measures the change in prices for all consumption items, not just those paid for out-of-pocket by consumers.
For example, the weight on health care in the PCE reflects what consumers pay out-of-pocket for premiums, deductibles, and copayments, as well as the costs covered by employer-provided insurance, Medicare, and Medicaid.
details Brookings, formerly known as the Institute for Government Research.
The Federal Government chooses to go with the CPI, while the Federal Open Market Committee (FOMC) focuses on PCE inflation in its quarterly economic projections. The Committee had used CPI as well before 2000. But, after “extensive analysis,” changed to PCE inflation for three main reasons, as defined by Brookings:
1)The expenditure weights in the PCE can change as people substitute away from some goods and services for others; 2) The PCE includes more comprehensive coverage of goods and services, and 3) historical PCE data can be revised (more than for seasonal factors only).
says the Research Institute.
Can GDP per capita and US federal minimum wage provide more accurate information?
GDP is where the PRODUCTIVITY of labor comes into play as a large identifier of inflation. According to the global research group RAND Corp, wages should follow productivity. The latter is logical, as employees should be paid some percentage of what they make for their company.
The productivity of each citizen is averaged and represented by the Gross Domestic Product (GDP) per capita. Researchers can also break it down to the country, state, and even county levels. So, why is CPI bad? Because it does nothing to measure that productivity.
Additionally, the US federal minimum wage, which is adjusted from the CPI results, does nothing to reflect the true state of things, according to some researchers. Remember the pin we put in government manipulation? a popular subreddit r/workreform alleged that the true inflation is much higher than the reported 6.5% inflation in Dec. Instead, the economy faces more threat, as the GDP is not included in the calculations.
The GDP price index, like the CPI, measures price change for consumer goods and services but also measures price change for goods and services purchased by businesses, governments, and foreigners. However, unlike the CPI, the GDP price index does not measure price change for imports.
defines the Bureau of Labor Statistics
Also, the GDP relies on the PCE price index as its measure of change in consumer prices. However, CPI and GDP per capita have different outcomes, and the skew is not in favor of the government.
So, after discussing different inflation gouges out there, the question remains: why is CPI a terrible measurement of inflation?
CPI is a lie – the imposed, lower standards of living prove it.
From everything discussed above, there are several obvious conclusions. First – the CPI is dependent on the basic consumer basket and can be manipulated by the government. Second – the cost of living is wider than the basket included in the CPI, which puts the whole concept of relying on CPI into jeopardy. Third – the US federal minimum wage does not keep up with the true inflation, despite being allegedly adjusted to it.
Thus, adjusting the US federal minimum wage on the DGP per capita instead of the CPI might be a better idea, given the inclusion of productivity in the measure.
CPI (CPI-U) is designed to measure price changes faced by urban consumers, who represent 93% of the US. population.
Personal consumption expenditures price index (PCE) from the Bureau of Economic Analysis also uses data on prices from BLS. However, the PCE price index measures the change in prices for all consumption items, not just those paid for out-of-pocket by consumers.
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