CPI Up 0.1 Percent: How Much is the CPI Understated?

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.1 percent before seasonal adjustment.

An increase of 0.4 percent in the shelter index accounted for almost 80 percent of the 1-month all items increase. The food index rose in December, with the indexes for food at home and food away from home both increasing. The energy index, which rose sharply in November, declined in December as the gasoline index decreased.

Percent Change CPI Items

Despite energy commodities rising 10.8% the CPI is only up 2.1% year-over-year, assuming of course you believe the numbers. I find most of them believable.

What's Believable?

Some readers may dispute this, but the price of food at home has been stable.

I have done nearly all our grocery shopping for my entire life and I worked on grocery stores from 1968-1972. I know what food prices were on sale then and I know what they are now. My judgment is based mainly on meat and cheese prices which make up the bulk of our food bill.

I by few snacks and few prepared or frozen foods. I do not buy milk or cereal. We tend to have meat or fish with a salad. Those buying packaged goods or organic vegetables may see things differently.

Energy commodities are easily measured so those prices rate to be accurate.

New and used cars down and apparel down are all believable.

What's Not Believable?

​Given reported health care premium increases, I find medical care expenses mostly a joke.

Shelter at plus 3.2% is a proven joke. The Case-Shiller National Home Price Index is up 6.2% in the last year.

At one time, the CPI incorporated actual home prices but now it doesn't. Homes are considered capital investment.

The Fed made a huge mistake in the housing bubble years by ignoring home price inflation and they are making the same mistake again now.

Calculating OER

OER, Owners' Equivalent Rent, accounts for 24.583 percentage points of the CPI. The BLS says OER rose 3.2% year-over-year.

The BLS calculates OER by asking this exact question: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

If you think that's ridiculous, you're not the only one.

Understated CPI

If home prices were in the CPI, then we could add another 0.74 percentage points ((6.2-3.2) * .24583) to the year-over-year CPI.

That would make the year-over-year CPI 2.84% not 2.10%. And that's without a realistic assessment of medical expenses.

John Williams at ShadowStats, an economist perpetually predicting hyperinflation, goes off the deep end in the other direction. Williams believes the CPI is at 6 percent.

Flawed Methodology

Of course, there is no such thing as a representative basket of goods and services in the first place.

Moreover, it makes little sense to average all the components the way the BLS does.

To top it off, the CPI fails to factor in clear bubbles in financial assets. Those financial bubbles are a direct representation of unreported inflation.