- The prices used for each city for each of the 500 items in the index.
- The weighting methodology.
We take the precise price for the same item quarter by quarter and calculate the increase or decrease. We tracked the prices on a quarterly basis and created a weighted index based on price. These items include basically everything that most Americans consume during the regular course of their lives.
Other Price Indices are Not Transparent Either
Size of the Discrepancy
Cost of Living Versus Price Indices
The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. We use a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, and not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this role to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime, that would constitute a complete cost-of-living framework. Since the CPI does not attempt to quantify all the factors that affect the cost-of-living, it is sometimes termed a conditional cost-of-living index.
- Due to productivity, average wages should rise faster than the price of final output (otherwise all real income growth is captured by capital, which is not predicted by almost any economic theory, nor shows up in the data). By implication, there should be rising real consumption by households (the magnitude of the rise in the standard of living is a point of debate).
- The way seniority is treated in the market place, an individual's wages is expected to rise faster than the average. (If we compared "seniority cohorts" over time, each cohort should have wage growth in line with the average.)
- Income taxes feature rising marginal rates, and tax brackets are not indexed.
- International comparisons. In addition to trade data, multinational corporations imply economic linkages across countries. A country that doctored its data would end up with data that is out-of-sync with international peers.
- Nominal GDP is equal to nominal gross domestic income (GDI). If we assume that nominal GDP is growing faster than reported, then nominal incomes have to be growing faster than reported as well. Average hourly earnings are reported, and one can compare that to local experience to see how plausible the numbers are. Meanwhile, earnings of corporations are relentlessly scoured by equity analysts that have nothing better to do with their lives. National accounting of profits follow different conventions than financial accounting, but analysts would pick up on corporations in aggregate massively outperforming nationally reported data.
- Real GDP is a vague concept that has theoretical issues if you think too much about it. However, it is expected to be highly correlated with real activity variables. Falling real production implies that workers are becoming far less productive, unless one starts inventing alternate employment data that suggests that unemployment is continuously rising beyond what is being reported. Many important real activity variables -- automobile production, oil production, railroad car loadings, even cardboard box production -- are reported by private sector bodies. If the real economy were shrinking, so would those reported figures. (I do not pay for such data sources, but based on my experience from when I did, all of them were coherent with officially reported GDP data.) By implication, a large number of private sector bodies have to be in on the conspiracy to cook internally consistent data.
- Many prices (e.g., commodity prices) are either available from market data, or are compiled by trade bodies. These can be compared to official price indices. Since CPI inflation is a traded financial product, there is a lot of interest in doing such comparisons. (For example, private data is narrower, and produced in a more timely fashion.)
Raw, Stinking, Misinformation
The government’s baseline CPI measure excludes items such as taxes, energy, and food. [emphasis mine] It is clearly manipulated and biased, therefore it is rarely accurate.
This is a line that is popular on fringe hard money websites, but is incorrect. The official CPI used for cost-of-living adjustments is the headline CPI, which includes food and energy. Economists strip out food and energy to calculate "core inflation," which is only used by them for analysis.
Including such a statement is a glaring red flag.
- It is entirely possible to define a "cost of living" index that rises faster than reported CPI (especially if one compares a regional price versus a national average). An individual's cost of living is based on their lifestyle choices; if you wish, you can have a very expensive lifestyle.
- The Chapwood Index numbers are too far away from published data to be chalked up to technical index construction issues. If we believed that the price level of the economy moved in line with the Chapwood Index, it would imply that government statisticians across the developed world are creating an elaborate fantasy world with thousands of internally consistent economic time series, and the private sector is in on the act, producing data that are coherent with the government's story.