On the whole, the method the government uses to track inflation through the Consumer Price Index is a decent gauge. It tracks the prices an ‘average person’ in America pays for a particular basket of goods. That said, there are a number of alternative inflation measures which may better capture the ultimate value of your money – now and in the future. Perhaps an overly strict index isn’t the best choice?
Therein lies the crux of the problem: the strict definition of the goods basket in CPI.
Who among us is a ‘typical person’, who spends their money in the exact proportions as the average of all Americans? Well, no one… which opens up all inflation measures (not just the CPI) to complaints from someone.
So, let the complaints continue, and let’s look at a few other inflation measures that compete!
The PCEPI – Personal Consumption Expenditures Price Index
The PCEPI is an inflation measure (technically a deflator) based on just the Personal Consumption component of the Gross Domestic Product of the United States. We first discussed the PCIPE in our article on whether college students are better off today or in the past.
Even though a common complaint about the CPI is that it understates year to year price changes, it actually tends to understate changes in price over longer ranges of time. Since inflation should factor in when product are substituted and the PCE contains substitution by default, it is likely a better indicator to use over longer time periods. So while some looks at the past use the CPI as a deflator, it’s often more fair to use the PCEPI to determine the cost of goods in the past.
You can find the PCE Price Index (like I do) on the St. Louis Fed website.
The Billion Prices Project
The BPP is a very interesting project from my standpoint.
It uses e-commerce to come up with a real time daily glimpse of a basket of goods online. It tracks prices online across many countries, and can watch how the relative prices of products shift when exchange rates vary. When new places sell a product (and a new page is found), the index automatically factors in the new seller to the index.
Check out the Billion Prices Project at MIT.
The Everyday Price Index
Think the CPI is weighted too heavily to big ticket items like cars, trips, building materials and technology? You aren’t alone, and you’re right in thinking that low-tech products have increased rapidly in price the last few years. The American Institute for Economic Research agrees and took the idea to its logical conclusion – only counting items which the average American buys once a month or more. Toothpaste in; computers out. From the site:
“The index includes food and beverages, household energy products and services, other utilities, motor fuel, prescription drugs, child care fees, phone services, personal care products, and other goods and services purchased on a regular basis. “
Check out the AIER and the EPI.
Other Inflation Measures and Indices
There’s no shortage of indices compiled to track inflation (Big Mac Index, anyone?). A number of new indices and indicators also are constantly released. We just wanted to shine a spotlight on a few of the more interesting ones for your next inflation argument!
Which inflation measures do you like the best? Can you pick a favorite? Do you think the CPI under or overstates true inflation? Do you like the Big Mac Index?