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March 16, 2006
Thinking About The CPI
Whatever today's CPI report might bring, David Wessel sets us up for the inevitable grumbling about why it does not mean whatever it seems to mean. Writing in today's Wall Street Journal (page A2 in the print edition), Messr. Wessel covers most of the usual complaints:
If You Think Inflation Is Contained, You Don't Live In My House
Some consumer skepticism is inherent in the way a price index is calculated. It is an average -- and no one is average. It measures the change in prices in a basket of goods and services that matches no one person's shopping list: Medical care accounts for 4.8% of the CPI. But if you are chronically ill, you will notice rising health-care costs more. College tuition accounts for 1.1%. But if you have a child in college -- well, you get the idea. The CPI is a national average: The fine print shows that prices rose 1.7% in 2005 in the San Francisco area, but 4.8% in the Miami area.
Give a Statistician an Inch...
Monthly changes in the CPI, the ones that get the most media attention, are adjusted to remove usual seasonal fluctuations. "In many cases, we may talk about a component declining when it actually rose, but less than it historically did in that particular month," says Patrick Jackman, the Bureau of Labor Statistics price maven. "It doesn't make much sense to the man in the street to tell him that gasoline prices declined, when they just rose less than the seasonal pattern expects."
U.S. government inflation figures also recognize that a $1,500 personal computer available today is more powerful than a $1,500 PC purchased three years ago. If it is twice as powerful but carries the same price tag, then the BLS counts that as a price cut...
And then there is housing. To the consternation of some economists, the CPI doesn't track the rising price of houses directly, but instead relies on rents, which have been rising more slowly than house prices...
If You Think Inflation Is Contained, Try to Live On My Paycheck
Consumers who complain that the government understates inflation may really be saying that their paychecks don't seem to go as far as they once did. For many Americans, that is true. But it isn't that prices are going up faster than the government estimates. It is that their wages aren't keeping pace.
Should we have sympathy with these arguments? Sure, They in part reflect the different uses to which any price index is put. But from my perspective, none of them are really compelling reasons to suggest that policymakers should discount what the official figures have to say. The blunt tools of monetary policy can at best control the average pace of price-level growth. Likewise, monetary policy is not the right place to look for a palliative for weakness in real income growth. And while seasonal adjustments, quality adjustments, and the exclusion of asset prices are all reasonable, and well-vetted, issues for debate, there are good reasons for all of those decisions. At the very least, not seasonally adjusting the price statistics, ignoring quality improvements, and confounding durable expenditures with the price of consumption flows would be just as problematic.
David Wessel may be right...
... the complaining...never stops.
... but I'm willing to think that the CPI really does tell us something about what monetary policymakers should care about -- the general purchasing power of money. Heck, I'll even take the "core CPI" seriously. But that's another argument.
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