CPI 101

Every now and then you might hear someone in the media refer to something called the CPI.  Rather than disregarding it as some strange financial jargon that doesn’t apply to you, pay close attention to it as this little informative factoid affects your life more than you realize.

 

CPI stands for Consumer Price Index and measures the price change of the things purchased by you.  The percent change in CPI is a measure of inflation.  For example, if a gallon of gas cost $3.00 last year and now costs $4.00, the annual rate of inflation for gasoline would be 33%.  CPI is one of the most closely watched national economic statistics.

 

Why should you care about CPI?

1. Your paycheck is tied to CPI as employers use it when determining payroll adjustments.
2. Social Security and other retirement pension payments are tied to CPI.

 

CPI Quick Facts

1. CPI is calculated by the Bureau of Labor Statistics (BLS).  The BLS is a unit of the Department of Labor, which is a cabinet of the government and appointed by the president (this means it is exposed to political pressures).
2. Federal spending is tied to movements in CPI.
3. Interest rates on US government debt are tied to CPI.
4. CPI is used in calculating the country’s “real” GDP (a.k.a. the country’s output).

 

So, it is easy to see that payments made to you and others by the government are tied to CPI.  So just like anybody paying for a car, house, etc… the government’s goal is understandably “how to get the lowest payment?”  It is in their best interest to keep the CPI measure as low as possible.  Unfortunately, if it is in the government’s best interest, it is probably not in yours, because at what cost to you will they go to alter it?  For example, if CPI was calculated to be 10%, the government would have to adjust their payments upward by 10%.  However, if calculation adjustments could be made to lower the CPI to 5%, when in fact the “real” number is still 10%, the government wouldn’t have to pay as much.  Try to stay with this… So, in this case the government expense is reduced to 5% while yours is still at the “real” higher rate of 10%. 

 

Is this happening?  Well, ask yourself, how far do people go to reduce their payments?  Do they embellish their incomes?  Do they try to bend their expenses?  Would the government, filled with politicians, be any different?  You can answer those.

 

Any questions?

 

In our next class we’ll learn about the methods employed to suppress CPI.