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What’s wrong with America’s consumer-price index?
Experts underestimated inflation last year. Now they seem to be overstating it
By almost any measure, American inflation is running hot. On October 13th the Bureau of Labour Statistics reported that the consumer-price index (CPI) rose in September by 5.4% year-on-year. In August, the Federal Reserve’s preferred gauge, the price index for core personal consumption expenditures, was up by 3.6% from a year before, a 30-year high. But some economists reckon these eye-popping numbers may be exaggerating the true costs being borne by consumers.
The discrepancy comes down to changes in spending habits. When the pandemic struck in early 2020, and lockdowns were ordered across America, consumers dramatically decreased their spending on some things, such as transport and entertainment, and increased it on others, such as food. But because the CPI was still being estimated based on a basket of goods and services set in December 2019, these shifts were not immediately reflected in inflation statistics. Using credit- and debit-card data from Opportunity Insights, a research group, Alberto Cavallo of Harvard Business School has constructed a new “covid CPI” that incorporates up-to-date weights from the spending data on each category. He estimates that between April 2020 and February 2021, monthly year-on-year inflation was underestimated by about 0.5 percentage points.
Now the reverse is happening. As America’s economy has reopened, prices in spending categories that were hardest hit by the virus such as transport and recreation have surged. But because spending on such things is still well below pre-pandemic levels, consumers are not experiencing the full effects. Mr Cavallo reckons that year-on-year inflation is being overestimated by about 0.5 percentage points. Among low-income households, who tend to spend less on transport, the gap between official and actual inflation is nearly 0.75 points.
As long as spending is distorted by covid-19, America’s statisticians may struggle to get their numbers right. This will take time. According to The Economist’s normalcy index, which tracks behaviour across eight indicators, activity remains more than 25% below pre-pandemic levels. On at least three measures—retail traffic, international and domestic flights and attendance at professional sports events—activity since late July and early August has been moving in the wrong direction. ■