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Does CPI Reflect True Inflation? Some on Wall Street Have Doubts. Article by Forsyth / Barrons
This is supposed to be a free gifted link. While an Ad pops up, i found it possible to knock it out and view article. Let me know if it doesn’t work. Thanks
The U.S. has historically been the gold standard for economic data. However, this doesn't mean that there isn't room for improvement.
Since the 1980s, "owner's equivalent rent" has been used to gauge home prices. To obtain this data, homeowners guess how much it would cost to rent their homes. This "dirty data" is a lagging indicator which may not accurately reflect actual housing costs.
Health insurance premiums comprise a significant part of medical spending for many consumers. However, the BLS does not directly track health insurance premium costs. Consequently, medical spending data tends to decrease CPI price changes.
"Even though insurance premiums are an important part of consumers’ medical spending, the BLS does not directly price health insurance policies. In a direct approach, we would track the movement of insurance premiums, holding constant the quality of insurance, and use these price relatives to build the Health Insurance index. However, the BLS has been unable to consistently control for changes in quality such as policy benefits and risk factors. Price change between health plans of varying quality cannot be compared, and any quality adjustment methods to facilitate price comparison would be difficult and subjective. As a result, we developed an indirect approach called the retained earnings method." https://www.bls.gov/cpi/factsheets/medical-care.htm
We also have to contend with the indiscriminate firing of BLS employees which has already impacted data sampling and the potential manipulation of CPI data to bolster the current administration's false narratives. The future credibility of U.S. economic data is now being questioned.
For apartments BLS could use Zillow, apartments.com, rent.com and zumper to search same apartment complexes in each city to get estimate of large apartment complexes. Confidence rate would be pretty high with enough apartments selected. Supposedly Federal Reserve is looking at using this apartment data as a leasing indicator for price trend for next 12-18 months.
For healthcare, could use public rates on FEHB that covers 8.2 million people, which is largest in the USA and the world. But they refuse because they track health care cost directly, not insurance premiums, even though majority of people have insurance. Well, BLS does calculate health insurance separately via health care expenditure survey to thousands of families.
A basic internet search yields the following CPI Criticisms:
1. Substitution Bias: The CPI uses a fixed "basket" of goods and services to track price changes. However, it doesn't fully account for the fact that consumers often substitute cheaper alternatives when prices rise. For example, if the price of beef increases, consumers might buy more chicken instead. The CPI might not accurately reflect this shift in spending patterns.
2. Quality Improvements: The CPI may not fully capture improvements in the quality of goods and services over time. Newer products with better features may be more expensive, but their higher price might not be accurately reflected in the CPI if they are considered "new" and not yet included in the basket.
3. Changing Spending Patterns: The CPI's fixed basket also struggles to adapt to changing consumer preferences and spending habits. For instance, the rise of online shopping and the decline of brick-and-mortar retail might not be fully reflected in the CPI's calculation.
4. Volatility of Food and Energy Prices: The CPI includes volatile components like food and energy prices, which can cause significant fluctuations in the index. This makes it difficult to discern underlying inflation trends. For example, a temporary spike in oil prices can significantly impact the CPI, even if overall inflation remains relatively stable.
5. Alternative Measures: Some economists prefer the Personal Consumption Expenditures (PCE) index as a more accurate measure of inflation because it allows for more flexible adjustments to spending patterns and new goods. The GDP deflator is another alternative that considers changes in the overall economy, including new goods and services.
While the CPI is a valuable tool for tracking inflation, its limitations mean it's not a perfect measure of the cost of living or a complete representation of the inflationary experience.
Inflation: We all know what it is. We can see it in the prices of things we buy. But how do you measure / quantify it accurately? Is that even possible?
Life in the 1800s was a lot different than in the current century. Transportation : Horse & buggy / In1869 you might have traveled coast to coast by rail. Medical care: The country doctor who visited your home. Food: A lot of it home grown Entertainment: Reading by oil lamp at night. Late in the century you might have purchased an Edison “victrola” (hand-cranked) and have listened to some scratchy sounding tunes. In 1880 the first motion picture arrived.
1900 - There were a few cars now (electric mostly). In 1908 you might have been fortunate to own a Model T Ford. In 1914 the first commercial flight took place (Tampa / St. Petersburg). In 1920 United Airlines began service. Electricity in homes became a popular “must have”. It became common in urban homes in the 1930s. Rural areas lagged. Under FDR a program to install electricity in 85% of homes was completed in 1945. Autos became popular. The interstate highway system initiated under Eisenhower was built in the 1950s. Entertainment: (Commercial) AM radio first aired in 1920. WNBT NYC began broadcasting images (via television) in 1941.
2000s - What a leap in standard of living just a couple hundred years! Today - Fiber optic and satellite based broadband. The advent of commercial space tourism. Self-driving / nearly self-driving autos. Virtual reality. Computers in our pockets. 24-hour always connected (always “breaking”) news.
The problem:How can you compute a meaningful “cost of living” tracker when what constitutes “living” itself is in such a constant state of flux?
People always needed to eat. That hasn’t changed much. You can compare the price for a pound of your favorite steak in 1800 with today I suppose. Supermarkets didn’t exist then. 60% of us lived and worked on farms. Was a pound of top-sirloin the same in 1800 as now? (flavor, freshness, packaging, availability?). A gallon of oil in 1800 oddly enough cost about $2.00. Don’t panic, however, as you’d be most likely to use only a little to light your evening lamp.
Home heating costs? Most homes in 1800 were heated by wood burning stoves or fireplaces. How to get a meaningful “home heating” inflation figure here when the process entailed daily back-breaking work splitting & carrying logs? Move on to 1900 when homes were largely heated by coal burning stoves or fireplaces. How to determine the “inflation factor”? Today’s N/G or electric systems are so much cleaner, easier to operate and more reliable.
How about the cost of air travel? Is a “tourist class” seat on AA or United the same product today that it was 40-50 years ago (I say not.) Do the CPI calculations take that into consideration? Do the figures even attempt to factor in things like number of connecting flights or frequency & length of delays? OTOH: One might argue that the same flight today at a higher (much smoother) altitude in a faster plane, over a shorter time is indeed “more product” then aboard a much louder slower moving flight on a twin-prop plane 50+ years ago. Are variances like that factored into COLA?
Cars? There is no resemblance really. How do you figure out how much car prices have “inflated” from an era (early 1900s) when you stood outside and hand-cranked the engine for a start to today’s product? Is it fair to incorporate things like air bags, A/C, run-flat tires, better lighting, automatic lane-keeping into the price and thereby determine cars haven’t really gotten “more expensive” because you’re just buying “more car” for the added price? It’s quality adjustments like these which BLS numbers attempt to factor-in that cause those published inflation rates to “bite” less than what we as individuals feel in our pockets,
Maybe that’s the reason gold holds the allure for some. It is possible to compare its price over the centuries.
Does CPI Reflect True Inflation? Some on Wall Street Have Doubts
• CPI says “no big inflation” — sorry to the hundreds of experts who swore it was coming any minute now. • S&P 500 at yet another all-time high — apparently Wall St. doesn't have doubts!!
Nobody swore "it was coming any minute now." The tariff hits are only barely beginning, and oil prices are low. Marketplace Morning Report this morning reported that the pre-tariff inventory stockup may fade in the next few weeks.
Wall St.'s on an AI and meme stock blast. Enjoy it while it lasts.
It doesn't have to be big numbers, a 3.1% core inflation for years can be very bad. Just as 2.7% headline can be bad over the long run. Especially cumulatively, on top of the last inflation shock. We WILL get lower rates, and that will add to the inflation as well. Companies are going to slowly roll out price increases, like boiling a frog.
Also, as mentioned in my other post, institutional money and the FED are watching "supercore" CPI - minus food, energy and housing. It is presently a little over 3.2%.
Does CPI Reflect True Inflation? Some on Wall Street Have Doubts
• CPI says “no big inflation” — sorry to the hundreds of experts who swore it was coming any minute now. • S&P 500 at yet another all-time high — apparently Wall St. doesn't have doubts!!
Weakening job numbers is more concerning than a little more inflation. AI, general uncertainty about economy and tariffs are causing unemployment for college grads to be higher than general unemployment rate. There were 30,000 - 50,000 applicants for 100-200 summer internships in top tech companies. Even small companies in small Midwest towns are getting up to 1,000 applications for one internship.
Heritage Foundation (conservative think tank) argues that broad indiscriminate tariff measures jack up production costs, disrupt American manufacturers (who rely on imported parts), prompt costly retaliatory duties, and ultimately cost U.S. jobs.
Among households where the head is 50 or older, about 23% hold more than $30,000 in non-retirement stock assets. We need that number to be > 75%!
The bots continue to march equities +35 to +50 bps per day at market open, and that's what matters...right? Who cares about jobs, economy, inflation, earnings, authoritarian coups, valuations, etc.
If Algos run the world markets, then that's the disconnect from reality. It's a game of chicken - there are numerous bears sitting on the sidelines, and the algos stare them down daily.
Who cares if earnings cannot support stock prices. Market breadth? Pfffft....Tech can overcome all.
Of course, none of us knows what is going to happen yet. Yet, there are some troubling signs, that shouldn't be brushed aside. It is way too early to assume that this utter rejiggering of trade, via taxation, will have no negative consequences, possibly profoundly so. It is best to remain open-minded, exercise a measure of caution and keep acquiring information.
My biggest concern here is that there is no credible team of economic minds at the wheel. We have many times been told that "those who were wrong before have no credibility" - paraphrased. Then apply that same judgment to this current 'economic' team, led by Stephen Moore, Bessent, Trump and the others.
I am still at a 58% equity allocation, and up 10% YTD, but holding lots of cash too. And consider lowering that equity allocation every day.
@DrVenture, slashing the Fed funds interest rate in times of rising inflation will show us all that the POTUS knows best.
Inflation and taxes will not have any stock market impact....until the algos flip the switch. Could be next week, next month, next year. Nobody knows.
If you are a consumer in the real world, it's a completely different experience. Which takes us back to the OP.......does the CPI data reflect reality?
Edit: Had never heard of the "sticky price CPI" report from the Atlanta Fed......
"The Cleveland Fed’s measure of sticky price CPI inflation, which includes items such as rent, food away from home, insurance, household furnishings and the like, has shown a steady uptick. It’s at 3.8% on a three-month annualized basis, the highest since May 2024."
Comments
However, this doesn't mean that there isn't room for improvement.
Since the 1980s, "owner's equivalent rent" has been used to gauge home prices.
To obtain this data, homeowners guess how much it would cost to rent their homes.
This "dirty data" is a lagging indicator which may not accurately reflect actual housing costs.
Health insurance premiums comprise a significant part of medical spending for many consumers.
However, the BLS does not directly track health insurance premium costs.
Consequently, medical spending data tends to decrease CPI price changes.
"Even though insurance premiums are an important part of consumers’ medical spending, the BLS does not directly price health insurance policies. In a direct approach, we would track the movement of insurance premiums, holding constant the quality of insurance, and use these price relatives to build the Health Insurance index. However, the BLS has been unable to consistently control for changes in quality such as policy benefits and risk factors. Price change between health plans of varying quality cannot be compared, and any quality adjustment methods to facilitate price comparison would be difficult and subjective.
As a result, we developed an indirect approach called the retained earnings method."
https://www.bls.gov/cpi/factsheets/medical-care.htm
We also have to contend with the indiscriminate firing of BLS employees
which has already impacted data sampling and the potential manipulation
of CPI data to bolster the current administration's false narratives.
The future credibility of U.S. economic data is now being questioned.
https://www.nytimes.com/2025/08/10/opinion/stagflation-trump-economy.html?unlocked_article_code=1.dU8.7328.SqDKI87QMSKP&smid=url-share
Supposedly Federal Reserve is looking at using this apartment data as a leasing indicator for price trend for next 12-18 months.
For healthcare, could use public rates on FEHB that covers 8.2 million people, which is largest in the USA and the world. But they refuse because they track health care cost directly, not insurance premiums, even though majority of people have insurance. Well, BLS does calculate health insurance separately via health care expenditure survey to thousands of families.
1. Substitution Bias:
The CPI uses a fixed "basket" of goods and services to track price changes. However, it doesn't fully account for the fact that consumers often substitute cheaper alternatives when prices rise. For example, if the price of beef increases, consumers might buy more chicken instead. The CPI might not accurately reflect this shift in spending patterns.
2. Quality Improvements:
The CPI may not fully capture improvements in the quality of goods and services over time. Newer products with better features may be more expensive, but their higher price might not be accurately reflected in the CPI if they are considered "new" and not yet included in the basket.
3. Changing Spending Patterns:
The CPI's fixed basket also struggles to adapt to changing consumer preferences and spending habits. For instance, the rise of online shopping and the decline of brick-and-mortar retail might not be fully reflected in the CPI's calculation.
4. Volatility of Food and Energy Prices:
The CPI includes volatile components like food and energy prices, which can cause significant fluctuations in the index. This makes it difficult to discern underlying inflation trends.
For example, a temporary spike in oil prices can significantly impact the CPI, even if overall inflation remains relatively stable.
5. Alternative Measures:
Some economists prefer the Personal Consumption Expenditures (PCE) index as a more accurate measure of inflation because it allows for more flexible adjustments to spending patterns and new goods. The GDP deflator is another alternative that considers changes in the overall economy, including new goods and services.
While the CPI is a valuable tool for tracking inflation, its limitations mean it's not a perfect measure of the cost of living or a complete representation of the inflationary experience.
Inflation: We all know what it is. We can see it in the prices of things we buy. But how do you measure / quantify it accurately? Is that even possible?
Life in the 1800s was a lot different than in the current century.
Transportation : Horse & buggy / In1869 you might have traveled coast to coast by rail.
Medical care: The country doctor who visited your home.
Food: A lot of it home grown
Entertainment: Reading by oil lamp at night. Late in the century you might have purchased an Edison “victrola” (hand-cranked) and have listened to some scratchy sounding tunes. In 1880 the first motion picture arrived.
1900 - There were a few cars now (electric mostly). In 1908 you might have been fortunate to own a Model T Ford. In 1914 the first commercial flight took place (Tampa / St. Petersburg). In 1920 United Airlines began service. Electricity in homes became a popular “must have”. It became common in urban homes in the 1930s. Rural areas lagged. Under FDR a program to install electricity in 85% of homes was completed in 1945. Autos became popular. The interstate highway system initiated under Eisenhower was built in the 1950s. Entertainment: (Commercial) AM radio first aired in 1920. WNBT NYC began broadcasting images (via television) in 1941.
2000s - What a leap in standard of living just a couple hundred years! Today - Fiber optic and satellite based broadband. The advent of commercial space tourism. Self-driving / nearly self-driving autos. Virtual reality. Computers in our pockets. 24-hour always connected (always “breaking”) news.
The problem: How can you compute a meaningful “cost of living” tracker when what constitutes “living” itself is in such a constant state of flux?
People always needed to eat. That hasn’t changed much. You can compare the price for a pound of your favorite steak in 1800 with today I suppose. Supermarkets didn’t exist then. 60% of us lived and worked on farms. Was a pound of top-sirloin the same in 1800 as now? (flavor, freshness, packaging, availability?). A gallon of oil in 1800 oddly enough cost about $2.00. Don’t panic, however, as you’d be most likely to use only a little to light your evening lamp.
Home heating costs? Most homes in 1800 were heated by wood burning stoves or fireplaces. How to get a meaningful “home heating” inflation figure here when the process entailed daily back-breaking work splitting & carrying logs? Move on to 1900 when homes were largely heated by coal burning stoves or fireplaces. How to determine the “inflation factor”? Today’s N/G or electric systems are so much cleaner, easier to operate and more reliable.
How about the cost of air travel? Is a “tourist class” seat on AA or United the same product today that it was 40-50 years ago (I say not.) Do the CPI calculations take that into consideration? Do the figures even attempt to factor in things like number of connecting flights or frequency & length of delays? OTOH: One might argue that the same flight today at a higher (much smoother) altitude in a faster plane, over a shorter time is indeed “more product” then aboard a much louder slower moving flight on a twin-prop plane 50+ years ago. Are variances like that factored into COLA?
Cars? There is no resemblance really. How do you figure out how much car prices have “inflated” from an era (early 1900s) when you stood outside and hand-cranked the engine for a start to today’s product? Is it fair to incorporate things like air bags, A/C, run-flat tires, better lighting, automatic lane-keeping into the price and thereby determine cars haven’t really gotten “more expensive” because you’re just buying “more car” for the added price? It’s quality adjustments like these which BLS numbers attempt to factor-in that cause those published inflation rates to “bite” less than what we as individuals feel in our pockets,
Maybe that’s the reason gold holds the allure for some. It is possible to compare its price over the centuries.
• S&P 500 at yet another all-time high — apparently Wall St. doesn't have doubts!!
Wall St.'s on an AI and meme stock blast. Enjoy it while it lasts.
Also, as mentioned in my other post, institutional money and the FED are watching "supercore" CPI - minus food, energy and housing. It is presently a little over 3.2%.
There were 30,000 - 50,000 applicants for 100-200 summer internships in top tech companies. Even small companies in small Midwest towns are getting up to 1,000 applications for one internship.
Heritage Foundation (conservative think tank) argues that broad indiscriminate tariff measures jack up production costs, disrupt American manufacturers (who rely on imported parts), prompt costly retaliatory duties, and ultimately cost U.S. jobs.
Among households where the head is 50 or older, about 23% hold more than $30,000 in non-retirement stock assets. We need that number to be > 75%!
If Algos run the world markets, then that's the disconnect from reality. It's a game of chicken - there are numerous bears sitting on the sidelines, and the algos stare them down daily.
Who cares if earnings cannot support stock prices. Market breadth? Pfffft....Tech can overcome all.
Rising inflation is just a side show.
My biggest concern here is that there is no credible team of economic minds at the wheel. We have many times been told that "those who were wrong before have no credibility" - paraphrased. Then apply that same judgment to this current 'economic' team, led by Stephen Moore, Bessent, Trump and the others.
I am still at a 58% equity allocation, and up 10% YTD, but holding lots of cash too. And consider lowering that equity allocation every day.
Inflation and taxes will not have any stock market impact....until the algos flip the switch. Could be next week, next month, next year. Nobody knows.
If you are a consumer in the real world, it's a completely different experience. Which takes us back to the OP.......does the CPI data reflect reality?
Edit: Had never heard of the "sticky price CPI" report from the Atlanta Fed......
https://www.cnbc.com/2025/08/13/as-trump-berates-goldman-other-economists-agree-that-higher-tariff-inflation-is-coming.html
I had not seen that number recently. No idea that it was so high. And likely why the Fed is holding back so much.