Champagne and the Absurdity of CPI's

Posted by - Friday, March 15th, 2013

With the spectre of a triple-dip recession looming, unemployment at 7.8% and an average 1,200 pound paycut for workers since last May, England's Office for National Statistics (ONS) has decided it is time for a change.

The ONS has decided to get with the times and is updating the basket of 700 goods and services from 150 areas that it uses to track inflation through the consumer price index (CPI). To keep up with the times, and with how spending habits have changed while the British tighten their belts.

Fresh round lettuce is gone and iceberg lettuce is replacing it. E-books are being added, along with “continental sliced meats,” hot chocolate, blueberries and T-shirts as well.

In a sign that there is little to celebrate, champagne sold in restaurants and bars is now off the list while supermarket rum sales are in.

If all of this seems a bit bizarre and strangely selective, you are right on the mark.

There are a whole slew of inflation estimates and figures that can be used, and government officials regularly tweak the weighting of these goods and services, along with what they choose to track.

For example, here is how the British weigh categories of goods and services right now:

british cpi weighting

This can create widely disparate figures that don't line up to other inflation estimates. The UK's CPI has been as much as 3.8% away from the retail price index in the last five years. Right now, the official UK CPI is a full .7% away from a CPIH index that properly accounts for housing costs, which is clocking in at 3.3%.

The widely different figures are on this side of the Atlantic as well. U.S. CPI has averaged 2% and has never gone above 4% since the recession ended.

However, there is no denying that costs are significantly up for many goods and services in the USA. The RB Commodity Index -- which tracks the prices of coffee, cocoa, copper, and cotton, as well as energy -- is up 38% over four years, or 8.6% at a compound annual rate.

If you want a simpler and light-hearted measure, The Economist's Big Mac Index is up 5.2% since the recession ended. The idea is that McDonald's large distribution network is highly efficient and their prices reflect the cost of food, fuel, commercial real estate, and basic labor.

So when you see officials talking about steady and low inflation, please remember: they get to pick and choose what to track and how much it influences the final figure. It is incredibly easy to under-report the effects of price increases by simply not factoring them in.

Add in steadily dropping real wages and the fact that federal, state and local income taxes and social charges (i.e. Social Security) have risen 35% over the last four years, and you'll see how little CPI really matters to you and your wallet.

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