How The CPI Mistates Economic Progress
January 23, 1997
As the Boskin Commission pointed out, the consumer price index (CPI) has been over-stating inflation by as much as 1.3 percentage points each year since 1979. That error helped paint a picture of stagnant -- even falling -- wages and incomes. But a rosier picture emerges if the CPI is corrected, which is what Kenneth Deavers, chief economist at the Employment Policy Foundation, has done.
- Contrary to popular opinion, he found that earnings have actually risen 15 percent over the past 20 years -- rather than declining steadily as the old CPI formula had it.
- With bonuses and other factors that aren't included in average hourly earnings data the improvement is more than 20 percent.
- Add in workers' fringe benefits and real compensation improved 25 percent.
- Since 1975 real median family income has increased 40 percent.
An analysis of spending patterns reveals that poor households today consume at a level similar to that of the typical household of 20 years ago, a fact that would seem to contradict the notion that material standards have fallen greatly.
Source: Perspective, "CPI and the Myth of Decline," Investor's Business Daily, January 23, 1997.
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