Did The U.S. Government Just Manipulate The Inflation Rate?

nflation refers to changes over time in the overall level of prices of goods and services throughout the economy. The government measures inflation by comparing the current prices of a set of goods and services to previous prices. That turns out to be more complicated than it sounds. Here’s how inflation measures work.The primary CPI (CPI-U) is designed to measure price changes faced by urban consumers, who represent 93% of the U.S. po

The CPI is constructed each month using 80,000 items in a fixed basket of goods and services representing what Americans buy in their everyday lives—from gasoline at the pump and apples at the grocery store to cable TV fees and doctor visits. The BLS uses a survey of American families called the Consumer Expenditures Survey to determine which items go in the basket and how much weight to assign to each item. Different prices are weighted according to how important they are to the average consumer. For instance, Americans spend more on chicken than tofu, so changes in the price of chicken have a greater impact on the CPI.

The federal government uses a version of the CPI—the CPI for Wage Earners and Clerical Workers—to adjust Social Security benefits for inflation.

pulation. It’s an average, though, and doesn’t reflect any particular consumer’s experience.

Core inflation, whether the CPI or the PCE price index, is defined as the change in prices excluding food and energy prices, which tend to be volatile. While food and energy are, of course, major parts of any household’s budget, core inflation is often seen as a better indicator of the underlying pace of price changes.

Other approaches to discern the underlying inflation trend include the Cleveland Fed’s trimmed-mean CPI (which excludes the CPI components that show the most extreme monthly price changes) and median CPI (which reflects only the change in price in the center of the distribution of price changes). These measures get rid of “noise” by leaving out whichever prices behave erratically each month, rather than singling out food and energy prices every time.Economists think that the benefits of those goods should also be captured in price indexes so we can distinguish between price increases that reflect better quality and those that reflect true price inflation. The BLS has made some progress over time in accounting for quality—for example, for some goods they use “hedonics” to try to adjust prices for the value of new attributes—but price indexes still likely reflect a mixture of true inflation and quality improvements. This is particularly true because the sectors of the economy in which quality is particularly hard to measure, such as health care and education, are growing as a share of the overall economy.

How does the government measure inflation?