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Why Is Measuring Inflation So Damn Hard?
Math has less to do with CPI than you might think.
The inflation alarmists came out in force this month, and for good reason. The May CPI reading showed an annual price increase of 5%.
That’s a scary number for many reasons, not the least of which is that we are still down millions of jobs compared to pre-pandemic times. Imagine how much money will be spent (and high prices will go) when those millions of people have full incomes and not just limping along with unemployment benefits.
But how exactly is inflation measured and is it accurate? The initial calculation was simple but has evolved into a complex algorithm.
Let’s take a look at how CPI came to be, how it’s calculated today, and address some of its downfalls.
(Note: For those with math-phobia, don’t worry. I won’t into the nitty-gritty with Greek symbols and calculus. We’ll focus more on the decisions behind the math used, which is the true source of today’s CPI.)
The Original Calculation
The Bureau of Labor Statistics (BLS) started tracking consumer prices in the late 1800’s. The inflation caused by World War I required an accurate accounting of consumer prices, and the first CPI report was released in 1919.
