Consumers fall through gaps in price index
By Steven Church
Wilmington (Del.) News Journal
For consumers, measuring inflation is as simple as looking at their bills for food, heating fuel and gasoline. By that yardstick, inflation is causing them to dip deeper into their wallets than they have in years.
William Bretzger • Gannett News Service
Their experiences, however, are contradicted by the most widely watched, official measure of inflation — the Consumer Price Index.
Nikki Congo shops for groceries with her son, Isaiah, 7, in Wilmington, Del. Your grocery choices and mortgage may be at odds with the CPI.
The latest index, released in mid-September, showed that consumer prices nationwide are rising at a rate of 3.7 percent so far this year, the sort of number that often lifts the stock market. The next index is scheduled for release Oct. 19.
The CPI isn't wrong, but it doesn't measure things the same way consumers do, said Jim Butkiewicz, who teaches at the University of Delaware's Lerner College for Business and Economics.
"The CPI is trying to measure what happens in the whole economy and not what happens to you in any specific week," Butkiewicz said.
Every month, the U.S. Department of Labor sends hundreds of workers into 87 regions of the country to document prices at 23,000 retail establishments. They come back with prices that approximate what consumers pay for a variety of goods, from apples to autos.
But because the prices are only approximations, they can't apply to every person's shopping habits. Some people may tend to buy the more expensive version of the apples, socks or tape chosen for use in the index, which would give them a sense that inflation is worse than reported.
And then there's the quirk in the index that treats some price increases as price decreases. If an item like a computer or a car or a washing machine has new features that sufficiently improve its quality, federal economists sometimes log a higher price as a decrease. So in some cases a price that stays the same or goes up is actually working to lower the Consumer Price Index.
Most experts agree the quality adjustment is necessary because it reflects the fact that consumers are getting more value for their money, said Matthew Martin, an economist with Economy.com.
A few argue that a dollar extra is a dollar extra, no matter how much better the item.
"It's somebody sitting at their spreadsheets playing games," said Paco Underhill, chief executive of Envirosell, a market research firm that specializes in shopping behavior.
The calculation of housing costs sparks more debate among economists because housing has greater influence on whether the index shows inflation rising or falling. Instead of using the price of homes to figure out how much new housing costs consumers every month, the CPI uses rents.
That started in the early 1980s after economists concluded that high interest rates on mortgages were artificially boosting the index, said the University of Delaware's Butkiewicz.
Today, rents are falling as low interest rates lead more people to buy. As a result, using rents in the index makes inflation look lower, Butkiewicz said.
For anybody shopping for a new home, as Wilmington, Del., renter Joe Watson has been for the past two years, the idea that the index shows low inflation is hard to believe.
"I think most people have been priced out of the market," said Watson, who hasn't been able to find a house he can afford.
One thing the index doesn't reflect is an ever-expanding list of "must-have" purchases, said Underhill. Today every middle-class household needs a computer with Internet service, a cellular telephone and pay television, Underhill said.
The need for items they did not have in the past tends to add to consumers' sense that inflation is more severe than the index shows.
Despite its limitations, economists say that the CPI is more accurate today than it has been in years, thanks largely to improvements in the way the data is collected and analyzed.
But it is difficult to convince consumers of that simply because they tend to remember price hikes in things such as gasoline, and forget declines in items such as clothing, which has consistently gotten cheaper over the years, said Martin.
