Economics
The Consumer Price Index May Be Getting Inflation Wrong
A new measure gives a clearer picture by picking up price changes earlier—and detects much higher volatility.
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The consumer price index is one of the U.S. government’s most important instruments. The century-old gauge is designed to measure inflation, but the CPI is also used to calculate the economy’s “real” growth rate (that is, output adjusted for inflation). Social Security payments and federal government pensions are also pegged to it.
New research shows that the CPI is slow to reflect changes in prices—and, equally important, understates the degree to which prices move up and down. The problem stems from the way the government calculates the price of shelter, a category that makes up one-third of the index.