In 2008, the Bureau of Labor Statistics addressed some of the myths and misconceptions about its Consumer Price Index that have circulated over the years on the Internet, especially at several non-academic fringe websites that have attracted many, conspiracy-theory driven, cult-like followers. Here are some excerpts from the BLS article “Addressing Misconceptions about the Consumer Price Index“:
From the introduction:
A number of longstanding myths regarding the Consumer Price Index and its methods of construction continue to circulate; this article attempts to address some of the misconceptions, with an eye toward increasing public understanding of this key economic indicator.
Within the past several years, commentary on the CPI has extended well beyond the circle of economists, statisticians, and public officials. The strongest criticism of BLS methodology has not been concentrated in a single profession, academic discipline, or political group, but comes instead from an array of investment advisers, bloggers, magazine writers, and others in the popular press. Also, whereas in the past the CPI frequently was held to be overstating inflation, recent criticism has focused on supposed downward biases.
Appearing as they do in national media and in the age of the Internet, these criticisms probably have been more widely quoted and circulated than most academic journal articles and panel reports on CPI issues. Although the BLS welcomes comments and regularly discusses and debates measurement issues with its advisory committees and at professional meetings of researchers in economic measurement, the recent criticisms of the CPI have been directed not so much to the BLS itself as to the public at large. This article is an attempt to correct some of the misunderstandings underlying those criticisms.
From the conclusion:
It is hoped that this article has put to rest some of the misconceptions and myths about the CPI:
1. It is a myth that the BLS reduced the growth rate of the CPI by assuming that hamburger is substituted for steak.
2. It is a myth that the use of hedonic quality adjustment has substantially reduced the growth rate of the CPI.
3. It is a myth that the 1983 adoption of owner’s equivalent rent systematically reduced the growth rate of the CPI shelter index.
4. It is a myth that Social Security payments are updated by a CPI that does not include food or energy.
1. The sizes and effects of the changes implemented by the BLS have been overestimated by critics. The introduction of the geometric mean formula to account for product substitution has decreased the rate of change of the CPI by less than 0.3 percentage points annually, not by 3 percentage points annually as some have claimed.
2. The changes implemented by the BLS that some critics construe to be a response to short-term political pressure were, in fact, the result of analysis and recommendations made over a period of decades, and those changes are consistent with international standards for statistics.
Finally, the CPI is not, and can never be, a perfect index. Moreover, all of the topics raised in the recent commentary on the CPI — including the methods for dealing with consumer substitution, quality change, and owner-occupied housing—are critically important to the accuracy of the index. The very existence of the CPI methodological changes discussed here attests to the fact that the CPI must always be working to enhance the index. The CPI benefits from the work of academics and others who identify ways in which the CPI can be improved. The BLS also benefits when the public understands how the CPI is constructed and what the index’s strengths and limitations are. It is hoped that this article will help increase that public understanding.
MP: As the BLS points out, the CPI can never be a perfect index, and it faces many challenges constructing an index that accurately measures consumer prices, subject to the difficult issues of quality changes, product substitution, the introduction of new products, calculating owner’s equivalent rent, etc. But I’m confident that the career, Ph.D.-trained economists and statisticians at the BLS are giving us a reasonably reliable measure of consumer prices that is consistent with the international standards of the OECD, and is free from any politically motivated influence. Maybe I’m just too much of a mainstream economist and BLS “shill” but I see no conspiratorial evidence of intentional data manipulation, just hundreds of highly-trained and dedicated economists, analysts and statisticians at the BLS who take their jobs and research on price indexes seriously, and do the best they can to create the best possible “imperfect” price index – the CPI.
HT: Steven Hales