Measuring inflation is crucial for a country’s economic management and effective response to market changes. Many tools have been introduced to correctly and effectively measure inflation, yet the Consumer Price Index (CPI) remains the most widely used in many countries, including the USA. By “representing changes in prices of all goods and services purchased for consumption by urban households”, the CPI is used to measure inflation (Consumer Price Index, 2020, para. 5). It is considered to be the most representative economic tool in calculating inflation, despite its limitations and weaknesses.
The CPI uses two indexes to measure changes in product prices. One of them is the base year, which is used as an origin and a point for comparison. Another is the current year, which is used to indicate the difference between the two. The U.S. Bureau of Labor Statistics uses monthly surveys of about 23,000 retailers and service providers and nearly 50,000 landlords and tenants to accurately depict actual and most recent data (Consumer Price Index, 2020, para. 7). Although it focuses only on consumer spending on things like “food and beverages, housing, transportation, medical care … and other[s]”, countries and economists continue to use the CPI to measure inflation (Consumer Price Index, 2020, para. 1). The CPI dismisses investments, house purchasing costs, cultural values, infrastructure, and many other areas, which may not have a direct impact on inflation, but still significantly influence prices and economic activity.
Another problem of using CPI as the fundamental inflation measurement is its volatility. As it includes consumer spending and costs on food and energy, which are highly unstable, the CPI tends to overestimate changes over a short period. For instance, Boring (2014) suggests that data from the U.S. Federal Reserve and Department of Agriculture might be a better and more accurate depiction of increasing prices than the CPI. Even the core CPI that does not include prices on food and energy, is believed to misrepresent actual inflation.
Unfortunately, other indicators have failed to represent inflation successfully and, thus, have not been widely accepted. Despite its volatility, the CPI remains a major inflation measurement. Some experts believe that this calculation should no longer be considered and used in the future. Therefore, a new tool should be introduced that would accurately represent all the aspects of a country’s economy, including not only consumer basket prices but also criminal activity and cultural heritage.
References
Boring, P. (2014). If you want to know the real rate of inflation, don’t bother with the CPI. Forbes.
Consumer price index. (2020). U.S. Bureau of Labor Statistics.