How to Really Understand the CPI
Based on the CPI, with an update every six months, economist Mark Perry illustrates the path of prices since 2000. He just published his most recent graph:
Sometimes it’s easier to understand a percent if we see the actual price. Let’s just take a look at college tuition and cars.
For college tuition and fees from 2001–2021, the upward climb started at $16,987 at private universities. By 2021, according to U.S. News, they averaged $41,411:
Meanwhile, the price of new cars also went up, though not as much. For a Toyota Camry LE, at approximately $20,000 in 2000, the price (MSRP) rose to $24,840 with its 2020 model. One analyst also wanted to show us that the CPI might not precisely track prices because of other algorithm variables like quality changes. And finally, do note that the BLS will soon change how they collect auto price data.
But here is the graph:
And finally, having seen a two decade increase, I thought we should also note what has happened since last year. Here, we see car-related items topping the price hike list:
Our Bottom Line: The CPI
Just last week, Pew Research did a beautiful job of explaining the CPI. Or, as they said, they “popped the hood” and looked inside to see how it works.” What they saw included 8,000 housing units, 23,000 retail establishments, and online sellers and service providers in 75 urban areas. In addition, supplying the rental data, there were 50,000 landlords and tenants.
Statisticians at the Bureau of Labor Statistics then combine all of the data they collect monthly and sometimes more frequently. They put it together in groups that ultimately become the larger categories that they weight. An item’s weight is based on importance. Because we buy more chicken than tofu, by weighting, the index reflects the higher chicken price more than tofu’s. As a result, chicken has a greater impact on the CPI.
The following categories reflect CPI weights. Even though gas prices were up substantially, the CPI’s weighting system made sure the whole index did not go up by that much:
In a Brookings report dated June 2021, the CPI weights were slightly different:
So, where are we? Figuring out price increases is not as simple as it might appear. But we do know they are rising.
My sources and more: To see more of how Mark Perry tracks prices do take a look at his AEI blog. From there, you might enjoy, as did I, this dive into the CPI by Pew Research and also from Brookings. Then, for the new car data, Wolf Street came in handy.
Originally published at https://econlife.com on February 2, 2022.