How CPI Index Users Miss Good News on Prices

Unlike Energy, Food and Health, Some Imported Goods Are Much Cheaper

Jul 31, 2009

There are few fence straddlers in America, on the topic of inflation. Nearly everybody has an opinion. It's evil; but, as in the proverb on death and taxes - inevitable.

Expressing a dramatic viewpoint, Ronald Reagan, the actor and 40th President, said of inflation . . . "It's as violent as a mugger, as frightening as an armed robber and as deadly as a hit man."

Calvin "Silent Cal" Coolidge, the tight-lipped 30th President, made his disdain more specific. He called inflation a "repudiation of debt." The monetary economist and Nobel Laureate, Milton Friedman, suggested it is "taxation without legislation."

Inflation of Certain Products Has Jacked Up COLA Adjustments

For average Americans, as for most citizens of industrialized nations of the world, inflation is a vague general and progressive increase in prices, in which everything gets more expensive and valuable, except money.

Certain important items in the US economy have continually jacked up inflation rates, in recent years. This has necessitated costs-of-living adjustments (COLAs) in Social Security benefits, pension payouts, professional services and many everyday jobs practically automatic.

The adjustments are based on the Department of Labor's (DOL) Cost-of-Living Indexes, maintained by the department's Bureau of Labor Statistics (BLS).

Since 2001 over Thirty Popular Items Cost Less

In the first decade of the new century, the public ballyhoo over escalating costs of such weighty items as health, energy, commodities, and certain services has drowned out some really good news. During the present decade, the costs of over thirty consumer items have fallen, some by a great deal. Their decline was partly responsible for the decrease in the inflation rate of 1.4 percent, over the last 12 months.

Several treaties, including the North American Free Trade Agreement (NAFTA) - since its inception in 1992 - have effected a change in the importation by the US of many of the goods on the list of deflated goods and services. They are cheaper than would be possible if supplied from the US. Countries like China, Mexico, Venezuela, Japan, South Korea, India and Malaysia are examples of most-favored nations in our present trade that produce cheaper goods than the US could supply.

Consumer Price Index Measures Cost-of-Living Changes in US

In the US, calculating price changes is made possible by The Consumer Price Index (CPI). It is a measure of the average change in prices of goods and services purchased by households over time.

The U.S. Bureau of Labor Statistics publishes a CPI for two population groups: (1) the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers comprising approximately 32 percent of the total population; and (2) the CPI for All Urban Consumers (CPI-U) and the Chained CPI for All Urban Consumers (C-CPI-U), accounting for approximately 87 percent of the total population.

How the Cost-of-Living Index Works

The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors’ and dentists’ services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected in 87 urban areas across the country from about 50,000 housing units and approximately 23,000 retail establishments—department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments.

Taxes directly associated with the purchase and use of items are included in the index. In calculating it, price changes for the various items in each location are averaged together with weights that represent their importance in local spending. Local data are then combined to obtain a US city average.

The index measures price changes from a designated reference date. For the CPI-U (used in this article) and the CPI-W, the reference base is 1982–84 = 100.0. Therefore, an increase of 16.5 percent from the reference base is shown as 116.5. This change also can be expressed in dollars, meaning it is accurate to say that the price of a base-period market basket of goods and services in the CPI has risen from $10 in 1982–84 to $11.65 currently.

Cheaper Imported Goods and Services Often Cost Jobs

In rejoicing that imported goods and services - mostly manufactured goods - entering the US are cheaper, the country finds itself in a pickle; for cheaper foreign competition means job losses for American workers, in many cases. In the current recession, DOL reports that 7.2 million have lost jobs since the contraction began in December 2007: yet, the imports of several most-favored trading partners are relatively stable so far this year.

As for US inflation in 2009, the rate reported in the DOL Job Report for June was 2.7 percent, through the first half. Most estimates range from 3 percent or slightly higher, for the entire year.

First Tier of Cheaper Goods and Services, in the US since 2001 (percent change):

Second Tier of Cheaper Goods and Services in the US, since 2001 (percent change):

Third Tier of Cheaper Goods and Services in the US, since 2001 (percent change):

The copyright of the article How CPI Index Users Miss Good News on Prices in Globalization is owned by Howard Bryan Bonham. Permission to republish How CPI Index Users Miss Good News on Prices in print or online must be granted by the author in writing.