The CPI and Government's House of Mirrors

The Consumer Price Index (or CPI) was first released by the Bureau of Labor Statistics in 1919 and has been published every month since. It uses a statistical measurement of market prices to capture inflationary trends in select markets. The Bureau of Labor Statistics believes that by observing changes in the prices of a wide variety of goods over a period of time, inflationary tendencies can be accurately tracked. Therefore, the CPI aims to measure the rate of inflation every month and what effect this is having on the prices of certain goods.

The CPI is, generally, pretty straight forward but there are different types of indexes. The CPI-W (or CPI for Urban Wage Earners and Clerical Workers) seeks to calculate the rate of change in the prices of goods that clerical or wage earners consume. The CPI-U (or CPI for All Urban Consumers) observes the rate of price changes for goods that are purchased by all urban consumers. The reason a certain CPI is cited over another depends on what the statistic will be used for. Laborers and wage earners tend to use the CPI-W to calculate the needed percentage increase in wages so that their salaries can keep up with inflation. The CPI-U is primarily used to understand the effect of inflation on the average consumer in an urban setting. For most intents and purposes, the CPI-U is what is primarily used when discussing inflation and positive changes in the general price level.

There is yet another CPI and it is called the "core" CPI. The core CPI also tries to measure changes in prices of goods and services that urban consumers purchase. The main difference between the core CPI and the CPI-U is that the core CPI discriminates against certain "volatile" products. "Volatile" products are consumption goods that are said to have very "unstable prices" and would subsequently bring about unwanted sporadic movements in the CPI if not otherwise removed. As a result, the core CPI usually excludes commodities such as food products and energy goods which are said to experience sudden seasonal changes in price.

The core CPI is not used as often anymore and has been overshadowed by the Federal Reserve preferred "core Personal Consumption Expenditures Price Index" (or core PCE) that is published by the Bureau of Economic Analysis. The core PCE uses data on personal consumption expenditures -calculated by the National Income and Product Accounts- to arrive at the rate of inflation. The core PCE also leaves out "volatile" food and energy prices. The difference between the core PCE and the core CPI is in method and not necessarily what basket of goods is chosen.

The Austrian school position on indexes such as the CPI and the PCE is best understood via business cycle theory and the effects of monetary inflationary policies. First of all, the CPI is an average of the changes in price of particular goods and services that consumers enjoy purchasing. When mainstream economists and politicians obtain at the rate of inflation put out by the CPI, they use it as a yardstick with which to measure the price changes of all goods. If there is a good that is increasing in price quicker than the CPI then it must mean that there is some non-inflationary explanation for the occurrence.

In all reality, inflation is not a positive change in the general price level but an increase in the money supply. When the Federal Reserve prints out money, certain industries get the newly-printed money first. This "new money" is then used by the industry workers to purchase the certain goods and services that they desire. Austrian business cycle theory holds that the prices of those goods that come in contact with the "new money" first will rise first and a chain reaction will then occur with almost all prices throughout the economy. It would be too complex to get into a discussion here as to why these prices rise and in what manner they rise but the idea is that increases in the income of wage earners -propagated by Federal Reserve inflationary policy- increases the monetary demand for certain goods and also tends to increase the real demand. Sometimes, inflationary spending is concentrated in one or two industries. This results in what has come to be called economic "bubbles" or isolated pockets of inflationary price movements.

In addition, the use of such measurements as the CPI tends to steer the public's focus away from the idea that inflation could be anything other than a general increase in prices. It is because of CPI indexes that individuals have come to think of inflation as a positive movement of the prices of goods and not an increase in the quantity of money brought on by Federal Reserve Open Market Operations. In other words, the CPI informs people that the cause of a rise in prices is, well, a rise in prices. The CPI hides the idea that inflation can be independently measured from an increase in prices.

What has been discussed is more of a normative economic analysis of CPI as opposed to a positive economic analysis yet there are many economists who also have problems with the way the CPI is actually calculated.

So there you have it. The CPI and the PCE are just two more ways government gets away with the crimes it's committing.