Chapter 16: Does the CPI Overstate Inflation?

The CPI has an upward bias because it can’t track shifts from beef to tofu and back as consumers try to get the same quality of life from whatever products are cheaper this month. This was the basis of the outside experts’ criticisms of the CPI: the CPI does not track the “cost of living.’’ Their first recommendation was that “the BLS should establish a cost of living index as its objective in measuring consumer prices.’’ The BLS said it agreed in principle but that neither it nor anyone else knows how to do this in practice. It also said, “Measurement of changes in ‘quality of life’ may require too many subjective judgments to furnish an acceptable basis for adjusting the CPI.’’ Nonetheless, a new kind of index that in principle comes closer to measuring changes in the cost of living was created in 2002. This new index is called the Chained CPI-U (C-CPI-U). It more closely approximates a cost-of-living index by reflecting substitution among item categories. This new index may be an improvement, but it is unlikely that the difficult problems of defining living standards and measuring changes in the cost of their attainment over time will ever be resolved completely.