Keeping tabs on inflation

Alisa Roth Mar 14, 2008

Keeping tabs on inflation

Alisa Roth Mar 14, 2008


Tess Vigeland: So when this CPI figure comes out each month — the Consumer Price Index — there’s something that economists pay attention to called “core inflation:” inflation without food and energy costs factored in.

They say it’s because those prices are so volatile that they can’t accurately reflect overall prices, but anyone who’s gone to the grocery store or filled up at the gas pump lately knows those are two of the biggest expenditures we have.

We asked Marketplace’s Alisa Roth to find the logic in this monthly number.

Alisa Roth: Just in case you have a hard time keeping your economic indicators straight, let’s do a quick review. The Consumer Price Index or CPI is supposed to be a way to measure how much it costs to live. So imagine filling a grocery cart with everything you spend your money on: food, housing, clothes, transportation… you name it.

Every month, the economists over at the Bureau of Labor Statistics take all those costs and compare them to last month or last year, which in turn is supposed to tell us how much inflation there is.

How accurate is the index? Ask Ken Beauchemin, an economist at Global Insight.

Ken Beauchemin: Well that largely depends on who you are and where you live and what you typically spend your money on, so if your expenditures line up fairly closely with the mix that’s reflected in the CPI then it’s going to do a fairly good job.

The government tries to find ways to make the CPI more accurate for everybody. For instance, it tries to take into account changes in spending habits or substitutions: when consumers buy chicken because beef is too expensive.

The Federal Reserve uses the CPI to gauge inflation, but doesn’t count what it considers volatile figures, like energy costs and food. Some economists think that’s absurd.

John Williams runs a Web site called ShadowStats.

John Williams: I challenge you to find anyone who does not consume food or energy and if you consumer food and energy, looking at annual inflation including food and energy is legitimate and saying that you don’t have to count food and energy is absolute nonsense. It’s not reflective of anyone’s cost of living or anyone’s inflation.

There are plenty of other criticisms about the CPI, such as that housing costs aren’t accurately represented, especially in this sagging market.

But Ian Shepherdson of High Frequency Economics has a more benign take.

Ian Shepherdson: I would say that it’s probably the least bad of the bunch.

He says the CPI is about as accurate an inflation indicator as you can get. The real problem, he says, is that the cost of food and energy costs are going up disproportionately fast right now.

Shepherdson: When food and energy prices rise in a big, sustained way, you just have to grit your teeth and accept that it makes you poorer. Sometimes, there’s nothing you can do about it.

Which means, in the end, that inflation is in the eye — or the pocketbook — of the beholder.

In New York, I’m Alisa Roth for Marketplace Money.

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