Consumer prices are rising at the fastest clip in about 40 years, up 8.3 percent in April from a year earlier.
As popular anger over rising costs mounts, a chorus of critics argue that the skyrocketing inflation rate is actually being underestimated.
In YouTube videos, on conservative talk shows and in reports from financial analysts, critics argue that in recent decades economists have adjusted one of the government’s standard measures of inflation, the consumer price index, in a way that underestimates how quickly prices are rising. Those lower inflation rates give the government some economic breathing room, they argue, saving money on expenses like Social Security.
“The bottom line is these aren’t accurate numbers,” Fox News host Tucker Carlson said during a segment on inflation late last year. He added: “Do the math and you’ll find that the real number, the rise in inflation, isn’t even close to the 7 percent that Washington claims.”
But inflation experts say the changes in calculations over the years have made the reported rate a more accurate moment of how much prices are rising for shoppers. The rate under another method could be higher, they say, but the effect would be small, and the alternative number would be a poorer representation of the costs consumers struggled with. Inflation affects different people differently, but that doesn’t mean the total numbers are wrong.
“You have to understand the concept: what are people currently paying for consumption?” said Alan Detmeister, formerly chief of prices and wages at the Federal Reserve and now at the bank UBS. “It tries to cover out-of-pocket expenses.”
Here are two key changes that have been made to inflation since the 1980s and why economists have adopted them.
Change No. 1: Inflation excludes house prices
People skeptical of U.S. inflation measures often cite a change in how home costs are measured in the Consumer Price Index, a closely watched metric produced by the Bureau of Labor Statistics.
Understanding inflation and how it affects you
In 1983, the government switched from using house prices – including mortgage payments and maintenance costs – to using rents to measure the cost of housing.
The cost of housing for people who own their property is now measured by the so-called “equivalent of owners’ rent”: how much their home would cost to rent if they didn’t own it.
The idea is that houses are an investment. Home prices rise and you can eventually sell a property you bought for a profit. Rent, however, represents consumption. It doesn’t leave you with an asset that you can sell later.
Critics often argue that by ignoring house prices, the inflation measure underestimates the cost of living when house prices rise significantly and when it costs new buyers more to gain a foothold in the market. Some even claim that that if the government used the old method, its reported inflation rate today would be much higher than it was in the 1980s.
It’s true that inflation isn’t perfectly comparable over time because of the change in how housing was measured, said Omair Sharif, founder of the research firm Inflation Insights. But the change wouldn’t be enough to push current inflation higher than the nearly 15 percent it reached 40 years ago.
“Yes, inflation would be higher today, but at about 1.25 percentage points, not the 4 to 5 percentage points people say,” said Mr. Sharif, who pulled home price, mortgage costs and home repair data from the 1970s last year. the relevant weights, and did the math on the old numbers to see how much the change in methodology changed inflation.
“It wasn’t a great song like a lot of people think it is,” he said.
Another estimate — using calculations used in a paper for The Quarterly Journal of Economics and updated for the Full Stack Economics newsletter — found that including house prices and interest rates instead of rent would push inflation to 11.5 percent in February. would have brought the latest available date, up 3.6 percentage points from the official figure that month. That is more than Mr Sharif’s estimate, but still less than in the 1980s.
Others argue that the CPI’s rent metric underestimates the cost of other types of lodging, pointing out that real-time rent trackers tend to capture rising prices much faster. But that’s for a simple reason: they track new rents, while the CPI tracks a sample of existing rents, including for people renewing their lease.
“This divergence means the CPI isn’t doing a good job at this point telling the story of how expensive it is for an individual or household to get housing in a new city,” said Jeff Tucker, senior economist with the real estate industry. website Zillow. But the point is to better reflect what prices look like for all consumers, not just those looking for a new home, he said.
Change No. 2: Economists are trading expensive products for cheaper ones
Economists once collected a basket of items — such as eggs, milk, shampoo, and other items — and simply kept track of how much they cost over time, only rarely updating the basket. But that measure was criticized for possibly overestimating inflation, ignoring the fact that consumers adjust their spending both over time and as prices rise.
Economists started updating the basket more regularly about 20 years ago, and the weights are now reset every two years to reflect what people actually spend their money on.
Frequently asked questions about inflation
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar won’t go as far tomorrow as it did today. It is usually expressed as the annual price change for everyday goods and services such as food, furniture, clothing, transportation, and toys.
What Causes Inflation? It could be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Rapid price increases cause problems, but moderate price increases can lead to higher wages and job growth.
Can Inflation Affect the Stock Market? Rapid inflation usually causes problems for equities. Financial assets in general have historically performed poorly during inflation peaks, while tangible assets such as houses have held up better.
They also tried to take bills into account. Imagine if the price of cupcakes went up for a month. Instead of paying more, a consumer could buy cookies instead — a decent but cheaper dessert alternative — and their monthly costs wouldn’t increase.
They can also buy a container with fewer cupcakes, switch to a cheaper brand, or shop at a discount store where cupcakes are cheaper. To account for that behavior, the government modified the way it calculates inflation in some categories in 1999, correcting the problem in the eyes of many economists.
Critics sometimes bring up a separate point: that product swaps take place between completely different categories, such as the use of chicken when the price of steak rises. Those larger substitutions are not included in the normal CPI calculation, but are included in a measure called the Chained Consumer Price Index. While the CPI showed prices rose 8.3 percent in April from a year earlier, the Chained CPI was slightly more muted, at just 7.8 percent.
Do you think those changes are not enough? Surely there will be more. The Labor Department is still making constant changes to try to make the CPI a more accurate reflection of reality.
“It’s a good long-term method,” said Mr. Detmeister from UBS. “Over the course of a few months, even over the course of a year, it can be different from what’s happening on the ground.”
