Tag Archives: CPI



The world is aghast at the continuing rise in prices, the CPI most recently reported up 6.2% over twelve months ending October, the highest in 30 years. The 0.9% YOY print in October would obviously annualize a lot higher than that and was the highest YOY monthly increase in 40 years. The “transitory” discussion is becoming a joke because, whether or not the rate of increase declines, the CPI is not going to come down. Furthermore, the monthly trend in CPI (0.3%, 0.4, 0.6, 0.8, 0.6, 0.9, 0.5, 0.3, 0.4 and 0.9% from Jan. through October) is unremitting and Producer Prices, which lead the CPI continue to increase.

But it’s worse than that.

While Central Banks want to dilute the currency through inflation to deal with the unimaginable mountain of debt, in the short run there are important incentives to minimize the reported rate of inflation. These include (1) minimizing the inflation rate to show that “real growth” in wages (nominal wage growth less inflation) is encouraging (2) minimizing the CPI adjustments to entitlements  such as Social Security (3) minimizing interest payments to Treasury Inflation Protected Securities , TIPS (3) keeps interest rates (which are normally priced to provide a “real” return) low which minimizes the budget deficit (4) maximizes taxes because brackets are adjusted upward depending on the CPI and your tax rate moves up if your “real wages’ appear to be rising. Far more palatable to voters than an obvious rise in tax rate.

There are a great number of ways that the CPI measuring system has been “adjusted” over the years, and we have provided the details below this summary. Most material, and obvious at this point in time, is the “housing” component (the largest, followed by transportation and food/beverage) of the CPI. Housing is about 30% of “headline CPI” and 40% of “core CPI (headline minus food and energy).

Seems pretty simple, but back in 1999, according to the timeline shown below an “adjustment” was made. Within the 30 points of housing is “Owner’s Equivalent Rent” (23.8 points) and “Rent of Primary Residence” (5.9 points).  The definitions of “OER” and “Rent” follow.

“Owners’ equivalent rent of primary residence (OER)” is based on the following question that the Consumer Expenditure Survey (representing the Bureau of Labor Statistics) asks of consumers who own their primary residence: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

“Rent” is based on a survey of consumers who rent their primary residence, who are asked: “What is the rental charge to your [household] for this unit including any extra charges for garage and parking facilities? Do not include direct payments by local, state or federal agencies. What period of time does this cover?”

So: as the table below shows, the trailing twelve months ending October showed all items up 6.2%. Shelter (Housing) up was 3.5%. Since Shelter is about 30% of the index, the 3.5% held the 6.2% down.


Most of us know, anecdotally, that housing expenses are up a lot more than 3.5% in the last twelve months and the charts we have provided show that a more accurate estimate might be upwards of 12%. If the 30% Shelter component of the CPI were up 12% instead of 3.5%, the resultant CPI would be up 8.7% (not 6.2%). If Shelter were up 14%, the CPI would be up 9.3%. The “reality” of the situation, rather than numbers cooked up by the Bureau of Labor Statistics, is why household income, which mostly tracks the CPI, is not keeping up with the real cost of living. As a consequence, along with artificially suppressed interest rates, investors are reaching for yield and consumers are deal driven.

Roger Lipton

Below is the history of your CPI.  We have underlined “IMPROVEMENTS” and housing related changes. (We don’t make this stuff up!)


The original Consumer Price Index – started in 1919

  • Began publication of separate indexes for 32 cities (1919): Collected prices in central cities periodically
  • Developed weights reflecting the relative importance of goods and services purchased by consumers, from a study that BLS conducted in 1917–1919 of family expenditures in 92 industrial centers
  • Collected prices for major groups: Food, clothing, rent, fuels, house furnishings, and miscellaneous
  • Limited pricing to items selected in advance to represent their categories
  • Began regular publication of a national index, the U.S. city average, in 1921: Based index on an un-weighted average of the city indexes
  • Estimated the U.S. city average back to 1913, using food prices only

The 1940 CPI revision: the first comprehensive revision

  • Used weights based on a 1934–1936 study of consumer expenditures
  • Collected prices in the 34 largest cities

Improvements made between the 1940 and 1953 revisions

  • During World War II: Discontinued the pricing of unavailable items, such as new cars and household appliances
  • Increased the weight of other items, including automobile repair and public transportation
  • Adjusted weights in seven cities, using a 1947-1949 survey of consumer expenditures
  • Adjusted weights based on the 1950 Census
  • Adjusted rent index to remove “new unit bias” caused by rent control
  • Added new items to the list of covered items, including frozen foods and televisions

The 1953 CPI revision: the second comprehensive revision

  • Used weights based on a 1950 survey of consumer expenditures conducted in central cities and attached urbanized areas
  • Added a sample of medium and small cities
  • Updated the list of items that the index covered, adding restaurant meals
  • Expanded the sample of rental units and added homeownership costs
  • Improved pricing and calculation methods

The 1964 CPI revision: the third comprehensive revision

  • Based weights on a 1960–1961 survey of consumer expenditures in metropolitan areas
  • Added single-person households to target population: urban wage earner and clerical worker households
  • Extended price collection of goods and services to the suburbs of sampled metropolitan areas
  • Updated the sample of cities, goods and services, and retail stores and service establishments

The 1978 CPI revision: the fourth comprehensive revision

  • Added a new Consumer Price Index: the CPI for All Urban Consumers, or the CPI-U
  • Renamed the older CPI to the CPI for Urban Wage Earners and Clerical Workers, or the CPI-W
  • Based weights on a 1972–1973 survey of consumer expenditures and the 1970 census
  • Expanded the sample to 85 areas (primary sampling units)
  • Increased minimum frequency for obtaining the prices of goods and services (known as “pricing”) from quarterly to bi-monthly
  • Implemented monthly pricing in five largest areas
  • Introduced probability sampling methods at all stages of CPI sampling
  • Introduced checklists that define each category of spending to clarify what is included or excluded from an item
  • Developed estimates of the CPI’s sampling error and optimal sample allocation to minimize that error

Improvements made between the 1978 and 1987 revisions

  • Began systematic replacement of retail outlets and their item samples between major revisions:
    • Implemented a Point-of-Purchase Survey (POPS)
    • Selected retail outlets with probability proportional to consumer spending therein
    • Eliminated reliance on outdated secondary-source sampling frames
    • Began rotating outlet and item samples every 5 years
    • Began rotating one-fifth of the CPI pricing areas each year
    • Introduced rental equivalence concept (January 1983 for the CPI-U; January 1985 for the CPI-W). Additional information on rental equivalence is available in a factsheet.

The 1987 CPI revision: the fifth comprehensive revision

  • Based weights on the 1982–1984 Consumer Expenditure Survey and the 1980 Census
  • Updated samples of items, outlets, and areas
  • Redesigned the CPI housing survey
  • Improved sampling, data collection, data-processing, and statistical estimation methods
  • Initiated more efficient sample design and sample allocation
  • Introduced techniques to make CPI production and calculation more efficient

Improvements made between the 1987 and 1998 revisions

  • Improved housing estimator to account for the aging of the sample housing units
  • Improved the handling of new models of vehicles and other goods
  • Implemented new sample procedures to prevent overweighting items whose prices are likely to rise
  • Improved seasonal adjustment methods
  • Initiated a single hospital services item stratum with a treatment-oriented item definition
  • Discontinued pricing of the inputs to hospital services

The 1998 CPI revision: the sixth comprehensive revision

  • Based weights on the 1993–1995 Consumer Expenditure Survey and the 1990 census
  • Updated geographic and housing samples
  • Extensively revised item classification system
  • Implemented new housing index estimation system
  • Used computer-assisted data collection
  • Added the Telephone Point-of-Purchase Survey (TPOPS) which allows rotation of outlet and item samples by item category and geographic area, rather than by area alone (this survey was previously conducted in person)

Improvements made between the 1998 and 2018 revisions

  • Developed the Consumer Price Index Research Series (January 1999): an estimate of the CPI for all Urban Consumers (CPI-U) from 1978 to present that incorporates most of the improvements made over that time span into the entire series
  • Initiated a new housing survey based on the 1990 census (January 1999): Estimated price change for owners’ equivalent rent directly from rents (an estimate of the implicit rent owner occupants would have to pay if they were renting their homes)
  • Began using a geometric mean formula for most basic indexes (January 1999): Mitigates lower level substitution bias and reflects shifts in consumer spending with item categories as relative price change
  • Expanded the use of hedonic regression in quality adjustment
  • Directed replacement of sample items in the personal computer and other categories, to keep samples current
  • Implemented 4-year outlet rotation to replace 5-year scheme
  • Implemented biennial weight updates starting in January 2002
  • Added the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) in August 2002
    • Uses more advanced “superlative” index formula (the Törnqvist formula)
    • Corrects upper-level substitution bias
  • Expanded collection of price data to all business days of the month (Before 2004, prices were collected the first 18 business days of the month for the first 10 months of the year and the first 15 business days for November and December.)
  • Began publishing indexes to three decimal places (January 2007)
  • Added CPI-E and published it back to 1982 (2008)
    • Congress mandated experimental consumer price index for the elderly (62 years of age and older)
    • CPI-E has limitations related to the expenditure weights, outlets sampled, items priced and the prices collected







The almost daily commentary from the Federal Reserve agents, Chairman Jerome Powell on Wednesdays and his agents, from Thursday through Tuesday, describe how their objective is to create at least 2% inflation over the long term. Since the rate of inflation has been below 2% for years, they will tolerate something more for an undefined term, aiming for a “symmetrical 2%”. The inflationary measures are clearly running over well over 2% this year but that is described as “transitory”, with the expectation that this rate (the second derivative) will soon come down. At that indeterminate time the Fed will “taper” their purchase of $120B per month of marketable securities and encourage higher rates. Many observers, including ourselves, have serious doubts about the economy’s ability to withstand higher interest rates, and expect the Fed to continue to kick the can down the road, as they have basically done consistently over the last twenty years or more.

Recall that several years ago, in late 2018, the Fed, after printing over $3T in the wake of the ’08-’09 crisis, reduced their balance sheet by about $500B over a few months, the stock market tanked about 20%, the political/economic punditry quickly screamed “basta” and the Fed backed off. The Fed balance sheet, at that point had been reduced to about $3.7T. Three years later it is over $8T.

Here’s what the facts indicate at this point in time.

There are two inflationary measures in our economy, the Consumer Price Index (CPI) and the Producer Price Index (PPI). CPI is a measure of the total value of goods and services consumers have bought over a specified period, while PPI is a measure of inflation from the perspective of producers.

Because the producer price index (PPI) measures inflation from the perspective of costs to producers of products before they reach consumers, it is generally thought to be a leading indicator of price changes that consumers will soon experience, to be reflected by the CPI.

The following charts show the reported changes in the CPI, on a monthly basis and over the last twelve months. You can see that prices are still rising but the monthly increase has “flattened” in the range of 0.5% per month. The twelve month 4-5% change is obviously well above the Fed 2% target, but their prediction continues to be that this rate is transitory, largely stimulated by the emergence from the pandemic.

Here’s the problem. The charts, below, of the leading indicator, the Producer Price Index, continue to show a monthly increase for total goods and services of about 1%. The rate of increase for “final demand goods” has backed off but the rate of increase for “final demand services” continues to steadily increase. Based on this, the CPI seems more likely to remain elevated than to come down.

We don’t profess to know whether these charts will continue, in the short run, to move upward to the right or not. Important policy decisions fall, for better or worse, to Jerome Powell & Co., who do not have a good record of foretelling major economic events. Though Powell didn’t create the fiscal/monetary mess the world faces, he is forced to do his best to avoid, on his watch, the inevitable fallout from decades of financial promiscuity.

Roger Lipton