The Real Reason The CPI Is A Broken Inflation Indicator

The CPI isn’t a particularly popular economic measure. A lot of folks think it’s broken — particularly those who are convinced hyperinflation is lurking around every corner, or here already.

But it’s actually not that bad. As PragCap recently noted, other inflation measures show a pretty similar situation to the CPI.

If there’s a reason to be sceptical of the CPI, it’s this. Many of its main components are broken markets that aren’t’ reflective of anything broader.

Here’s a chart from Doug Short looking at how the various CPI components have behaved over the last decade or so.


Photo: Doug Short

A few things stand out. One is that healthcare is far and away the biggest grower. But we know that the healthcare industry is broken six-ways from Sunday, and affected by all kinds of structural issues, so in terms of a gauge that the Fed should be looking at, its absurd.

Then look at the other end. Apparel gets cheaper and cheaper, completely oblivious to cycles. That’s a great thing — though deflationary — but again, obviously owing to big, secular trends and not to monetary policy.

Education is another area that’s completely divorced from market fundamentals, and not surprisingly it basically only goes up. Energy is basically a purely cyclical thing, and if you look at housing, it actually spiked recently thanks to higher rents.

So while the CPI probably does capture the average of various prices reasonably, the average of various prices isn’t that useful when so may areas move on their own unique situations.

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