Why The CPI Needs To Go

In this post, I want to talk the glaring weaknesses in the CPI statistic, which is the most popular number to measure inflation in the US Economy. Also, I want to discuss an alternative we should be using and why I don’t think it is being used. Now I have questions around the CPI and like so many I want answers..

(1) Now most people know the CPI is a lagging indicator. So, it Measures a period of time with price changes. Now, in my opinion, we need to be using something that measures price changes in real time. We have the capability to do this now more than ever. So for example, we should be using scanner data, say from the grocery store for things like food price changes and also, we should be using online data, say for example to see price changes for other goods. Now there could be some challenges with this such as sales and coupons, but if the dataset is large enough then there shouldn’t be any problem after capping and flooring the data. Now my personal belief on this they don’t have the personnel and skills to handle the coding and big data, but that’s just my opinion. 

The fed doesn’t need to change because there’s no competition. See if a company, begins falling behind because they are using older methodology, then they’ll have to adapt and pick up the new technology. If they don’t, they’ll go out of business. 

(2) The methodology takes into account changes in the quality of goods and substitution. So, if I buy filet mignons every week for $25 and the price goes up to $35, and as a result, I substitute my good, I buy flank steak for $25 the CPI is not going to account for that price change from $25 to $35. Now to me, I find this borderline funny. Who can possibly defend that methodology? The CPI is supposed to measure a market basket of goods over time. This is clearly not happening. 

(3) The Phenomenon known as shrinkflation. Now most people have heard this term and seen this in action. If you haven’t its simply your price is staying the same, but your amount is decreasing. For example, my cereal is $5.00 for 12 oz, now its $5.00 for 10oz. 

Now, I want to talk briefly why does the government likes low inflation. 

(1) CPI stat runs inverse to GDP, so a decrease in CPI should theoretically raise GDP which could be interpreted as the economy doing better than it actually is. 

(2) Make no mistake, The federal govt likes A lower CPI. And really it makes sense, when you think of payments it must make like social security and TIPs (Treasury Inflated Protected Securities). These lower payments lead to lower govt expenditures.