As Elon Musk Questions Inflation Numbers, Economists Say CPI Understates Inflationary Environment

People shop at a grocery store in Monterey Park, Calif., on April 12, 2022. Frederic J. Brown/AFP via Getty Images

During Tesla’s first-quarter 2022 earnings call on April 20, billionaire Elon Musk noted that “the official numbers actually understate the true magnitude of inflation,” citing some suppliers raising costs by as much as 30 percent for parts.

In December, the billionaire founder of Pershing Square Capital, Bill Ackman stated in a tweet that official statistics have understated raging inflation figures.

“Housing inflation is unlikely to abate based on supply and demand trends,” Ackman wrote. “The inflation that households are actually experiencing is raging and well in excess of reported gov’t statistics.”

The U.S. annual inflation rate surged to 8.5 percent in March, with nearly everything higher than a year ago. But is this the real inflation number in the United States?

For years, there has been plenty of discussion and analysis surrounding the accuracy of the consumer price index (CPI), making this commonly used basket a controversial mechanism to gauge inflation.

Undated file photo showing crowds of people walking in a street. Jane Barlow/PA

Critics argue that if the CPI were calculated the way it was prior to the 1990s, the real inflation reading would be a lot higher than the official numbers show today.

A common complaint from some economists is that housing prices aren’t factored into the CPI, although they were included in the nation’s CPI between 1953 and 1983. If it were returned to the CPI basket, it’s estimated that housing costs would add about 2 percent to the inflation report.

The Bureau of Labor Statistics (BLS) said it doesn’t factor in housing prices because residential properties are considered investments, which don’t enter into the CPI. However, it does include rent in the monthly snapshot of the cost of living because the tenant is paying for a service from a landlord.

Another method that the BLS employs to find out how large or small inflation might be in any given month is by weights. When the U.S. government is calculating the index, price changes are aggregated with weights, accounting for their importance and representation in the spending of the broader consuming public.

In the aftermath of the pandemic, consumers concentrated more of their food consumption on groceries rather than restaurants. Spending on food away from home dropped more than 30 percent, while spending on food at home rose more than 10 percent.

“Spending on public transportation (which includes airfare) was down over 60 percent, but spending by homeowners on their homes, for example on home maintenance and repair, increased over 14 percent,” the BLS wrote in its January 2022 update.

This is a part of the debate between utilizing a cost of goods index (COGI) or a cost-of-living index (COLI). In other words, should the CPI calculation crunch the data using a fixed basket of goods or permit substitutions?

If beef prices rise, shoppers may swap for a cheaper form of meat. A COGI measurement would still use beef’s price increase to determine inflation. COLI would let the beef be substituted for a less expensive type of meat.

Should consumer spending revert to its pre-pandemic trends, the BLS would use 2019 consumer spending data as the main source of spending weights.

Does this mean the federal government is understating inflation? Some purport that Washington benefits from suppressing inflation as much as possible. Economic experts have stated that the Federal Reserve, the Treasury Department, and pension plans generally prefer subdued inflation levels to avert the drawbacks of an authentic inflation reading.

If a CPI reading is lower, for example, the Social Security Administration faces reduced fiscal pressures when applying a cost-of-living adjustment to retirement benefits.

This year, Social Security and Supplemental Security Income increased 5.9 percent.

Because of this, U.S. economist John Williams, who runs the popular Shadow Stats website, believes that the real inflation rate is around 15 percent.

“The growing difference in perception versus reality primarily is due to changes made over decades as to how the CPI is calculated and defined by the government,” he writes.

“Specifically, changes made to the definition of the CPI and related methodology in recent decades have reflected theoretical constructs offered by academia that have little relevance to the real-world use of the CPI by the general public. Importantly, the public usually has not been aware of or understood these changes.”

The CPI no longer measures the cost of living but rather “the cost of surviving,” said Donald Klepper-Smith, chief economist at DataCore Partners, LLC.

“The BLS is more responsible for taming inflation than the Federal Reserve because of their rejiggering of the mathematical algorithm,” he told the Yankee Institute, a free-market think tank. “Back in 1980, your CPI was 13.5 percent, and had we been using the algorithm from 1980, we’d be looking at 14.5 percent today.”

He said the tools used in the 1980s to calculate inflation weren’t perfect either, but the statistics the federal government relies on today “are not adequately measuring inflation the way consumers are experiencing it.”