Why the Consumer Price Index Doesn't Work

Ben Bernanke is so busy computing academic formulas that he forgot to go shopping and take a look at what’s really going on out there. He is famously called helicopter Ben after he made the statement that he could drop money out of helicopters to fight deflation. Is that a joke? This guy has a PhD in economics and has studied the great depression for the most part of his career, yet he thinks these tactics will work when there are clear examples in history that prove otherwise. You can never print money forever, period. Eventually the local economy will fail under such policies as evidenced in Zimbabwe and Germany within the last century. The greatest insult to our intelligence is the consumer price index (CPI). For those of you who aren’t sure what this is, it’s simply a measurement the government uses to track inflation or rising prices of goods we buy. The CPI for the first quarter of 2012 was 2.8%. What hogwash! You see, the CPI measurement conveniently leaves out price increases in food and energy (gasoline included) which are two of the most important goods all people buy regularly. In addition, prices have increased in these two areas well over 2.8%. Other tricks I have seen while shopping at the grocery store is less food being packaged in the same size bag, smaller portions for the same amount of money as last month, etc. You see, even if the price stays the same and you’re getting less product, that is inflation. In addition, gas prices have risen almost 15% since December of last year. Real life tells a different story and when you actually do the shopping you see real world data. If you are one of those people that really trusts the CPI data, I beg you to reconsider. Many financial advisors will use this figure to advise you the minimum amount you need to make to not lose purchasing power on your money. If you only looked to make 2.8%, you would be misled and actually losing purchasing power because of inflation in energy and food which is not counted. The better number to look at is non-core CPI which does include food and energy. This figure is fluctuating between 1-2% higher than the 2.8% core CPI number that is reported in the media. The problem with the non-core number is that it averages inflation across all goods. Again, most people spend a much larger ratio of their money on food and gas. These two areas are seeing much larger price increases than in other categories and this must be considered when planning investment strategies. Once you get to the real analysis, you may find that you need to grow your money at 4-5% just to keep up with inflation.