Our Finite World | Providing a wide view of what may be ahead. Weblog and Essays. It's Time to Ditch the Consumer Price Index (CPI) April 17, 2014 So why does the government maintain such a transparently inaccurate and misleading metric? For three reasons. That the official rate of inflation doesn't reflect reality is obvious to anyone paying college tuition and healthcare out of pocket. The debate over the accuracy of the official consumer price index (CPI) and personal consumption expenditures (PCE--the so-called core rate of inflation) has raged for years, with no resolution in sight.
The CPI calculates inflation based on the prices of a basket of goods and services that are adjusted by hedonics, i.e. improvements that are not reflected in the price of the goods. The CPI attempts to measure the relative weight of each component: Many argue that these weightings skew the CPI lower, as do hedonic adjustments. Over time, an artificially low CPI/COLA lowers government expenditures (and deficits, provided tax revenues rise at rates above official inflation). The solution? FINANCIAL SENSE | Applying Common Sense to the Markets.
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