One of our favorite things to debate here on DQYDJ is the validity of the inflation rate. On the whole, we think that the method the government uses to track inflation is a decent gauge of the prices an ‘average person’ in America pays for a particular basket of goods.
That strict definition is where many of you have a problem. Who among us is a ‘typical person’, who spends their money in the exact proportions as the average of all Americans? Well, no one.
So, let the complaints continue, and let’s look at a few other inflation measures that compete with the Consumer Price Index.
The PCEPI – Personal Consumption Expenditures Price Index
The PCEPI is an inflation measure (technically a deflator) based on just the Personal Consumption component of the Gross Domestic Product of the United States. We first discussed the PCIPE in our article on whether college students are better off today or in the past.
Even though a common complaint about the CPI is that it understates year to year price changes, it actually tends to understate changes in price over longer ranges of time. Since inflation should factor in when product are substituted and the PCE contains substitution by default, it is likely a better indicator to use over longer time periods. So while some looks at the past use the CPI as a deflator, it’s often more fair to use the PCEPI to determine the cost of goods in the past.
You can find the PCE Price Index (like I do) on the St. Louis Fed website.
The Billion Prices Project
The BPP is a very interesting project from my standpoint, since it leverages e-commerce to come up with a real time daily glimpse of a basket of goods online. It tracks prices online across many countries, and can watch how the relative prices of products shift when exchange rates vary. When new places sell a product (and a new page is found), the index automatically factors in the new seller to the index.
Check out the Billion Prices Project at MIT.
The Everyday Price Index
Think the CPI is weighted too heavily to big ticket items like cars, trips, building materials and technology? You aren’t alone, and you’re right in thinking that low-tech products have increased rapidly in price the last few years. The American Institute for Economic Research agrees and took the idea to its logical conclusion – only counting items which the average American buys once a month or more. Toothpaste in; computers out. From the site:
“The index includes food and beverages, household energy products and services, other utilities, motor fuel, prescription drugs, child care fees, phone services, personal care products, and other goods and services purchased on a regular basis. “
Check out the AIER and the EPI.
There’s no shortage of indices compiled to track inflation (Big Mac Index, anyone?), especially ones which have come into existence in the last ten years. We just wanted to shine a spotlight on a few of the more interesting ones for your next scheduled argument!
Which index do you like the best? Do you think the CPI under or overstates true inflation? Do you like the Big Mac Index?