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  • Writer's pictureJoe Carson

Current CPI Is Flawed, But A "Real-Time" Price Measure Would Be Higher and More Volatile.

Critics argue that the current inflation rate is much lower than the published rate. That is true; based on the current methodology, "real-time" consumer inflation is less than the published rate. Thirty-five percent of the prices used to estimate the consumer price index are not for the current month but reflect the prices over several months, according to the Bureau of Labor Statistics. Most of that involves the owner's rent index. Because rents change infrequently, the Bureau of Labor Statistics measures these service prices over six-month spans.

The owner's rent index is the brainchild of government statisticians and academia, supported by politicians who want a lower, less volatile price index. Yet, the owner's rent index has two "major" problems.

First, it is not a current price. Rent changes, up or down, would not be captured in the CPI until six months after they occurred. So, given its massive weight in the index, owners' rent would result in reported inflation running below current inflation at the beginning of the rent price cycle and overstate it at the end.

Second, it is not an actual price. The owner's rent index is supposed to measure or capture inflation experienced by people who own a house. But no homeowner pays that price. Economists and policymakers often talk about demand destruction from higher inflation, but there is no demand destruction here since no one pays the price.

A "real-time" and more accurate measure of inflation would require a shift back to the inflation methodology pre-1983. That would include house prices and mortgage rates, creating a real-time, more volatile, and higher published inflation rate. So pick your poison---a flawed index or a higher volatile index? Complaints about the current CPI are frequent, but they would only get louder if a shift to a real-time measure of inflation occurred.

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