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Does Inflation From The Old VS New CPI Matter? NO
By Mark Perry on August 22, 2008 | More Posts By Mark Perry | Author's Website
Some of the recent CD discussion has focused on the possible difficulties of comparing today’s inflation rates to the inflationary 1970s period because of the changes that have been made to the way the BLS calculates the CPI. There was also some discussion about the timing of the changes to the CPI. Thanks to CD reader Spencer for the suggestion to check the BLS website for a comparison of the CPI-U-RS series (new) vs. the CPI-U series (old).
I was able to locate the BLS study “Consumer Price Index Research Series: Using Current Methods, 1978-1998,” which finds that “the measured rate of inflation would have been lower since 1978 if methods currently used in calculating the Consumer Price Index for All Urban Consumers had been in place from that year to the present.”
In other words, the old BLS method of calculating the CPI-U overstated inflation (which has been taught in Principles of Macro for decades), and various adjustments (14 in all, see Exhibit 1 in the study) made between 1983 (”changed homeowners’ component from cost of purchase to to value of rental services) and 1999 (the last 5 in 1998-1999 were maybe in response to the 1996 Boskin Commission Report?) attempted to make the CPI/inflation more accurate.
How big were the changes between the old CPI-U and the new CPI-U-RS after the 14 changes? Table 2 above tells the story:
1. Although most changes to the CPI lowered inflation rates under the revisions, some of the changes to the CPI actually increased inflation rates (see the row above titled “Effects of all other changes” that adjusted for the fact that the old series “understated” inflation in some ways).
2. Although the net effects in each period above were negative, meaning that inflation was overstated under the old methodology, the differences in inflation rates were relatively minor. For example, inflation from 1978 to 1982 averaged 9.46% annually under the old method and 8.46% under the new method, suggesting that the old method overstated inflation by about 1% per year.
For the other periods, the annual differences between old and new CPI inflation were relatively lower: -0.13% from 1983-1986; -0.35% from 1987-1997; and -0.23% in 1998, or an average of about 1/4 of 1% per year!
Bottom Line: With reasonable accuracy, we can fairly compare today’s inflation rates calculated from the CPI-U-RS used by the BLS today to the inflation rates of the 1970s that used the old CPI-U, with a possible difference annually of only about 1% at the most. In other words, if you subtract 1% from the double-digit 10-14% annual core inflation in the mid- and late-1970s, you still get inflation way, way higher than the 1.5%-2.5% range of core inflation over the last ten years.
My position remains that unless, and until, we have core inflation approaching double-digits, inflation is not a problem. And I don’t think there is near enough of a difference between the old CPI-U and the new CPI-U-RS to have that issue make any significant contribution to the inflation discussion.
Posted in Categories: Contributor, Economy, External Research.
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Your new article seems directed at my commentary but, alas, you simply ignore the obvious. What is it with you? Do you have an agenda because the Bush admin is paying you like they did so-called journalists in the past to sway public opinion. If you really wanted to address my complaint you would have simpy used the same CPA formula for 1978 forward, not try to rationalize your theory by adjusting the 1978 numbers.
The bottom line is whether Americans buy houses since that was the major change made by the Republican contract that came with Reagan. Before him the CPI used the cost of owning a home. After him, it was the cost of renting an apartment.
Another huge difference that does not show up in the formula but in reality is the size and real value of cars today vs yesterday. I am not getting paid for this so I wont be teaching applied economics today.
Suffice to say the CPI should be based on the real costs of things that the average American buys. Nearly 70% bought houses.
I rest my case.