Matthew C Klein, Columnist

A Better Way to Measure Inflation

Most people also have to spend money on assets that they hope will provide for them when they retire. A comprehensive measure of the cost of living ought to account for this. None currently does.Â

July 19, 2013 at 3:32 PM UTC

By Matthew C Klein

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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At what was almost certainly his final appearance before Congress as the chairman of the Federal Reserve, Ben Bernanke was asked whether government statisticians are undercounting the "real" rate of inflation. He responded by discussing the difficulties in measuring the cost of living and suggested that the widely-followed Consumer Price Index probably overstates inflation rather than understates it.

Bernanke is probably right -- if we're only talking about the rate of price increases of things we buy in stores, like food and soap, or services, like haircuts and dry cleaning. The problem is that most people also have to spend money on assets that they hope will provide for them when they retire. A comprehensive measure of the cost of living ought to account for this. None currently does.