The Consumer Price Index is broken and needs to be fixed, according to former head of the Bureau of Labor Statistics Keith Hall. Last week he stated the obvious saying the real unemployment rate is a lot higher than what the government officially reports. Hall also believes the CPI misses a whole lot of cost increases.
By JOHN CRUDELE
July 23, 2013
The Consumer Price Index is broken and needs to be fixed, says Keith Hall, the former head of the Bureau of Labor Statistics, whom my readers met last week.
Hall created a stir by saying what most of us thought was obvious: The real unemployment rate is a lot higher than what the government officially reports.
Hall doesn’t have an opinion about whether the current CPI is understating, or overstating, inflation. Most people, including me, think the CPI misses a whole lot of cost increases, especially in the areas of housing, health care and tuition.
The CPI is important for lots of reasons. One of the biggest is that the Federal Reserve uses this figure, and others, to adjust monetary policy. But the CPI is also used for cost-of-living adjustments to Social Security recipients and pensioners.
The CPI, which rose 0.5 percent in June on a seasonally adjusted basis, is 1.8 percent higher over the last 12 months.
Over the years, the government has fiddled with the calculations. For instance, Washington has been lowering the CPI because of quality changes in products — i.e., people may be paying more for something like a TV set, but they are getting more for their money.
That’s called hedonics, and it causes inflation to appear lower.
The CPI also adjusts when a product goes up so much in price that people are forced to substitute a cheaper item. Hamburger for steak, for instance, reduces inflation in government statistics.
But while the way of measuring inflation may have changed, the way the BLS and the Census Bureau gather their information hasn’t. And that’s Hall’s beef (or maybe it’s now hamburger) with the numbers.
“I think the CPI should be replaced with several indices,” Hall told me during a phone interview. The people who put together the CPI, he says, are “doing as good as they can with the resources they have.”
In an age when companies like Amazon know exactly what people are buying and at what price — minutes after purchases are made — the CPI is still calculated in a very old-fashioned way.
Each month, says Hall, hundreds of thousands of in-house surveys are conducted to see what Americans are buying. Then the surveyors go into stores to determine costs.
“They’ll walk into a store, pick up a can of tuna fish and look at the price,” says Hall.
“I think it could be done so much better ... it is really due for modernization.”
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