Many people have voiced concern over the years that the Consumer Price Index or CPI understates the inflation they are actually experiencing. This concern is supported by a forthcoming book titled The Mismeasurement of America: How Outdated Government Statistics Mask the Economic Struggle of Everyday Americans. The author is Gene Ludwig who served as Comptroller of the Currency under President Clinton.
The CPI is based on price changes on more than 80,000 items. Ludwig’s primary criticism of the CPI methodology is that the index includes many items beyond the reach of lower-and-middle income Americans including airline tickets, second homes, sports tickets, and golf carts. He believes that inflation in essentials such as rent, food, and health care is more relevant to average Americans and that prices of these goods and services generally rise at a faster rate than the CPI. Ludwig developed an alternative index he called the True Living Cost (TLC) which includes only a household’s minimal needs. He also made changes in controversial methodologies such as the way the Bureau of Labor Statistics calculates the cost of housing and healthcare.
As you can see, there are differences in the inflation rates produced by the two methodologies in some categories. I believe the entire effort gains credibility by virtue of the fact that Ludwig’s methodology produces both higher and lower inflation on various items.
Why does all of this matter? The next chart depicts growth in wages adjusted for each of the two methods of calculating inflation. Note that inflation-adjusted wages have grown moderately using the CPI but have fallen over time using the TLC.
I’m sure this is not the last word on the topic and there will certainly be economists who dispute Ludwig’s methods. However, we should carefully evaluate conflicting measurement techniques given the importance of the CPI in adjusting Social Security payments, federal tax brackets, and employers’ decisions regarding wages and salaries.