At the end of 1996, a study of the Consumer Price Index was done under the leadership of Michael Boskin in which they declared that the CPI has been overstated and that the index should have been at a rate of 1.8% as opposed to the reported amount of 2.9%. His report also included that the CPI had been overstated similarly of the past twenty years. The finding in his report shows that the government was doing a good job at controlling inflation and that productivity was higher than previously reported. Since our government uses index to adjust stats such as GDP per capita, a reduction in CPI shows our economic performance as improved. We cannot afford to take his report into consideration as there are many flaws and deceptions in his findings. The CPI is made up of many details below are a few key points that will help that will help to reveal the flaws and deceptions regarding Boskin’s determination.
Wrong Market Basket The BLS conducts a survey every ten years on consumer behavior in order to set up a weighted “market basket of goods and services” that is supposed to represent outlays of the average citizen and is adjusted for any changes they find in lifestyle. These adjustments only consider two lifestyles the CPI-W which represents living conditions for lower middle class and poor urban household getting their income from wages and salaries as clerical non-executive workers, and the CPI-U which represents non-wealthy urban consumers inclusive of wage earners, salaried workers, self-employed, and the unemployed. The current CPI-W does not paint an accurate picture of the standard of livings for the poorer classes and is actually the opposite as these inner cities crime rates have gone up causing these areas to deteriorate. As the CPI-U only tracks living patterns of the lower eighty percent of the population it leaves out over fifty percent of national income and ninety percent of financial wealth. This means that the current CPI-U understates changes in the cost of living. An understated cost of living can affect individuals in many ways. One of which would be the ability to get a raise in wages. If the cost of living is understated the wages of the individual will not change accurately enough for them to compensate for the “hidden” rise in the COL. This will create a lower disposable income as well as lessen the individual APS.
Use a biased ruler: Since the “basket of goods and services” is readjusted every decade, the CPI can hide the amount of people gradually sinking into poverty. The substitution of like items that are not alike causes the problem. For example, should a worker have a decrease in wages and is forced to take public transportation to get to work instead of using their car, economists such as Boskin would substitute the cost of bus fare for the cost of operating a car. This does not give an accurate picture of price changes for determining price stability and will not give an accurate picture of the countries inflation. This can leave many people vulnerable to “hidden inflation”. Elderly and lower income people will feel the effect as prices rise and their salary remains the same. Some can even be thrown into poverty. Again this effects the individuals APS and lowers our GDP.
Substitute Cheaper Goods When the price of an item gets too high, most individuals will substitute the item for something similar but cheaper in price. Economists such as Boskin will recommend that the CPI be calculated using the substituted cheaper priced items to reflect consumer behavior. This type of calculation hides the increase to the cost of living. For example, should the cost of food become too high for an individual, the increase to cost is ignored and the measurement is switched to the lower standard of the cost of living. This obviously makes it appear that the cost of living has not increased. The “hidden” rise in cost of living will hurt the individual as they are spending more money on items and receiving the same wages. The more money they spend can have a decrease in their standard of living and even throw some people in poverty. This can affect our GDP as individuals will be spending less. In addition the extra money being spent on “hidden” price rises will decrease the APS of the individual.