A More Accurate Consumer Price Index
December 11, 1998
In January 1999, the Bureau of Labor Statistics will replace its old Consumer Price Index (CPI) with a new series. The accuracy of the CPI is central to assessing whether, and by how much, American living standards are rising or falling. For instance,
- Correcting for errors in the CPI since 1973 changes a 13 percent decline in average earnings to an increase of almost 13 percent by 1995, according to economists Michael J. Boskin and Dale W. Jorgenson.
- And real median income, which officially grew only 4.3 percent over the same period, actually grew nearly 36 percent.
- Thus the inaccurate pre-1999 CPI portrays wages and incomes as falling or stagnating when in fact they are rising.
The new BLS series incorporates technical improvements similar to those recommended by the Boskin Commission. On an experimental basis, BLS has calculated a new series back to 1990, and it shows lower inflation than the official CPI. Thus, official estimates of growth in real earnings and income since 1990 are roughly 3 percent "too low." By 1997, real earnings had actually risen modestly from their pre-1990s recession level, and real per capita consumption was almost 14 percent higher than in 1990.
By 2020, adoption of the new CPI will show real growth has been 10 percent higher than would have been estimated using the old methodology.
Unfortunately, BLS has been unwilling to correct the CPI to account fully for changes in the range and quality of products and services, which the Boskin Commission said overstates inflation by more than .5 percentage points per year. Nor has the BLS corrected any of its previous estimates.
Thus, the official history of real earnings and income growth for American families in the past 25 years is overly pessimistic.
Source: "The Importance of an Accurate Consumer Price Index," Economic Bytes, December 8, 1998, Employment Policy Foundation, 1015 15th Street, N.W., Suite 1200, Washington D.C. 20005, (202) 789-8685.
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