Forget CPI. Real Inflation is Much Higher

by | May 11, 2023 | Blog Articles, Energy, Finance, Inflation, USA

This morning’s release of the latest Consumer Price Index (CPI) data, showing annual inflation had fallen slightly from 5.0 percent in March to 4.9 percent in April, was an unpleasant reminder that price inflation, while down from last year’s highs above nine percent, is far from behind us.

Yet there is increasing evidence to support the suspicion that CPI does not represent the actual inflation that Americans face as they struggle with rising prices for everything they use, including education, healthcare, housing, food, and energy. The felt experience of many consumers is that CPI underestimates the real rising cost of living. This is not just an emotional or subjective reaction. It turns out that private sector and other data such as regulatory filings undermine the message and the data provided by the Bureau of Labor Statistics (BLS), the U.S. government entity that manages the CPI.

Take the cost of higher education as an example. The CPI figures from the BLS indicate that inflation in college tuition and fees has been mild at 2.4 percent per year since 2013, and—remarkably given the general price inflation we’ve experienced—just above 2.2 percent per year on average for the past two years through March 2023.

Yet according to data from the National Center for Education Statistics, the average annual cost for a full-time student at a four-year degree granting institution is up 125 percent since 2000. This translates to 4.1 percent average annual inflation over twenty years. Public institutions have fared worse, with costs up 147 percent, while the average annual costs at private institutions are ‘only’ up 112 percent. These NCES figures go through 2021. According to figures from the Brown Center on Education Policy at Brookings, academic inflation is running hotter recently, at 5.3 percent in the 2020–2021 academic year and 8.5 percent in the 2021–2022 academic year.

The cost of medical care provides another illustration of the disconnect between the government’s data and private sector analysis.

The BLS CPI data for medical care suggests inflation has been moderate at 2.6 percent since 2013, and—again surprising—just below 2.2 percent per year on average for the past two years through March 2023. On the other hand, trend analysis from PwC’s Health Research Institute shows that since 2006, medical care costs have increased by 220 percent in total, representing an average annual rate of 7.6 percent. While not precisely a measure of inflation, the PwC analysis measures the “percentage increase in the cost to treat patients from one year to the next, assuming benefits remain the same.” For patients, the implications are the same. The analysis measures the increase in costs for the same services year after year, which are rising at three times what CPI indicates.

The story is the same for housing. The CPI data indicate that the cost of shelter is up 8.1 percent for the twelve months through April. Over the longer term, shelter is up 15.5 percent in total since April 2020, which represents just under 5.1 percent annually. Five percent per year is a lot, but still substantially underrepresents private sector analysis of similar housing costs. For example, the S&P/Case-Shiller U.S. National Home Price Index reveals that since April 2020, home prices are up 35 percent, or 11.1 percent annually. While not completely apples-to-apples, this is more than double the closest CPI category. Whether five percent or eleven percent or somewhere in between, median nominal wage growth, while recently increasing to around six percent, has been well below either level for much of the past three years. When housing prices rise substantially faster than income, homes become liabilities rather than assets, as we saw in the housing bubble which led to the global financial crisis.

For April, CPI Electricity is up 8.4 percent, while Food at Home is up 7.7 percent. I wrote earlier in the year for The Epoch Times describing how CPI was underrepresenting the rising costs of both electricity and food. In these cases, I looked at regulatory applications from regional power companies for double digit price increases in 2023, and historical same-good purchasing data from Amazon Prime, respectively. I won’t repeat that here, but the upshot of each analysis was again the same. They confirm that inflation for both energy and groceries is running, and continues to run, much higher than the CPI data indicate, and of course higher that the CPI aggregate itself.

I wrote at the time that “aggregate CPI figures underrepresent what the American consumer is experiencing in two important and fundamental ways. First “the costs most important to most Americans, namely, food, energy, and shelter, have risen much higher than aggregate CPI. Secondly, the CPI figures (which compare one year against the previous) tend to hide the “base effects” of inflation, meaning the compounding of rising prices over multiple years. The result of both is to distort and underestimate the real impact on Americans’ shrinking wallet.”

And so now I’m raising a third fundamental issue with the BLS data. CPI is simply not telling the whole story. Especially not the one being lived out by struggling working- and middle-class households trying to provide for their families. Inflation is, and will remain, much worse than what the government’s data indicate.

Read this article on The Epoch Times

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