So – whats wrong with CPI?

There are a couple glaring obvious things wrong with CPI:

Food and Energy are excluded – Yes, the core CPI index excludes food and energy prices because they are too “volatile.” Food and energy costs have exploded over the past five years. So even though food and energy costs are the big part of the budget pain in normal American families, those price categories are simply left out of the index.
Income, Investment, and Housing Taxes are Not Included – Taxes are a huge burden on American families – and tax receipts as a percentage of total national income have risen steadily with time. According to the Urban Institute Tax receipts have risen from 9.5% of GDP in 1929 to over 26% in 2002. Since only about 50% of the population actually pays taxes, and since many tax systems in the US are progressive – i.e. your tax burden goes up as your income and consumption trends go up, taxation is a huge and growing component of the overall household cost equation. Its funny that the government decided to leave their own bill out of the equation, huh?
Implied Future Taxation from Government Borrowing – The government is currently spending several hundred billion a year more than it collects in tax reciepts, so sooner or later, we will have to pay for it. So just like spending on a credit card, government borrowing looms over our head as a huge current cost that we just aren’t paying at this point. The same can be said of the trillions of dollars of unfunded future liabilities for Social Security and other entitlement programs that will come due over the next few decades.
The Substitution Effect – The government uses a little accounting trick called “substitution” to calculate the basket of goods that are used to calculate CPI. Thus, if a unique hand-made toy goes up in price, the government will substitute it for a cheap plastic toy shipped in from China by Wal-Mart. Since China has been shipping over cheap manufactured goods over the past ten years, we have seen the “basket of goods” tilt that way. So, we aren’t really judging the cost of the same standard of living, but rather the basket of goods is looking more and more like a Wal-Mart shopping cart.

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