The Wall Street Journal

March 16, 2006


This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit:

• See a sample reprint in PDF format.
• Order a reprint of this article now.

 For Bureau of Labor Statistics explanations of the CPI, see
 For the debate over how best to measure home prices in the CPI, see
 For international comparison on home prices in inflation measures, see

David Wessel, 50 years old, The Wall Street Journal's deputy Washington bureau chief, writes Capital, a weekly look at the economy and the forces shaping living standards around the world. He also appears frequently on CNBC.
David has been with The Wall Street Journal since 1984, first in the Boston bureau and then the Washington bureau, where he was chief economics correspondent. During 1999 and 2000, he was the newspaper's Berlin bureau chief. He also has worked for the Boston Globe and at the Hartford (Conn.) Courant and Middletown (Conn.) Press. He has shared two Pulitzer prizes, one for a Boston Globe series on race in the workplace in Boston and the other for Wall Street Journal stories on the corporate scandals of 2002.
He is the co-author, with fellow Journal reporter Bob Davis, of "Prosperity: The Coming 20-Year Boom and What It Means to You" (Random House/Times Books, 1998), which argued that the next 20 years will be better for the American middle class than the previous 20 years.
Write to him at capital@wsj.com10.

Why Inflation Seems
To Have Sharper Teeth
Than the CPI Suggests
March 16, 2006; Page A2

Write about inflation, and readers are quick to complain that the U.S. government's consumer-price index fails to capture the reality of rising prices.

"If you did your own personal study of inflation in your neighborhood...where you shop, you would be appalled at how much prices go up without being reported as inflation," Reggie Marselus emailed from Lenexa, Kan. "Government inflation figures are the most bogus numbers reported in the entire economic world."

The Bureau of Labor Statistics releases the latest CPI this morning. Forecasters say a drop in gasoline prices in February will keep the monthly increase in the CPI to a comfortable 0.1%, though that still is a sharp 3.7% above a year ago. Wall Street traders, private forecasters and Federal Reserve officials will scrutinize the details to divine if energy-price increases are spilling over into other items, pushing up inflation.

Americans coping with rising health-insurance premiums, or paying college or private-school tuition bills, or trying to buy a house, look at those numbers and scoff. The cost of living, they often say, seems to climb a lot faster. Some economists don't much like the most commonly used version of the CPI, either. They say it overstates inflation, but that is another story.

Some consumer skepticism is inherent in the way a price index is calculated. It is an average -- and no one is average. It measures the change in prices in a basket of goods and services that matches no one person's shopping list: Medical care accounts for 4.8% of the CPI. But if you are chronically ill, you will notice rising health-care costs more. College tuition accounts for 1.1%. But if you have a child in college -- well, you get the idea. The CPI is a national average: The fine print shows that prices rose 1.7% in 2005 in the San Francisco area, but 4.8% in the Miami area.

David Wessel talks4 about why the government's consumer-price index doesn't seem to reflect the reality of rising prices.

Monthly changes in the CPI, the ones that get the most media attention, are adjusted to remove usual seasonal fluctuations. "In many cases, we may talk about a component declining when it actually rose, but less than it historically did in that particular month," says Patrick Jackman, the Bureau of Labor Statistics price maven. "It doesn't make much sense to the man in the street to tell him that gasoline prices declined, when they just rose less than the seasonal pattern expects."

U.S. government inflation figures also recognize that a $1,500 personal computer available today is more powerful than a $1,500 PC purchased three years ago. If it is twice as powerful but carries the same price tag, then the BLS counts that as a price cut, a decline that offsets price increases in other things.

And then there is housing. To the consternation of some economists, the CPI doesn't track the rising price of houses directly, but instead relies on rents, which have been rising more slowly than house prices. The rationale: The CPI tracks the cost of living in a house, not its investment value. "Homeowners are assumed to rent to themselves at the market rent," the BLS explains. Japan does the same. Europe, in contrast, currently excludes owner-occupied houses from its pan-European price index.

[Capital Exchange]5
Reader comments6 -- and David Wessel's answers -- about the Capital column. Published Tuesday mornings.
Submit comments to Mr. Wessel at capital@wsj.com7

The mismatch between official inflation statistics and consumer perceptions reflects more than the fine points of measurement.

When consumers get a good deal -- a bargain airfare on the Internet or a case of soda on special -- they think they are great shoppers. When consumers see their electric bills go up, they curse rising prices. They don't look at airfare savings as offsetting electric-bill increases. They don't notice what the CPI does: The price of men's pants has fallen more than 5% in the past year.

That's not all. Consumers who complain that the government understates inflation may really be saying that their paychecks don't seem to go as far as they once did. For many Americans, that is true. But it isn't that prices are going up faster than the government estimates. It is that their wages aren't keeping pace. Blame the boss, not the BLS.

Not so long ago, inflation preoccupied Americans. A check of the Factiva electronic archives -- jointly owned by Dow Jones & Co., publisher of this newspaper, and Reuters Group PLC -- found 760,288 mentions of "inflation" from 1986 through 1996 in all publications tracked, outnumbering 636,074 mentions of "sex."

Then inflation receded. In the past 10 years, "sex" has been mentioned 3,317,716 times and "inflation" just 3,085,544 times.

But the complaining -- about the inflation measures, that is -- never stops.

 Email David Wessel at capital@wsj.com8. subscribers can see a Q&A9 Tuesday.


Thursday's consumer-price report showed declines in the prices in certain product categories from a year earlier.

Expenditure Category   % Change
From Feb. 2005
Tenants' and household insurance -2.1
Apparel -1.8
  Men's and boys' apparel -3.1
  Women's and girls' apparel -2.7
  Infants' and toddlers' apparel -1.3
New vehicles -.4
Communication -1.1
  Information and information processing -1.6
  Information technology, hardware and services -7.1
  Personal computers and peripheral equipment -14.8

Source: Bureau of Labor Statistics

  URL for this article:

  Hyperlinks in this Article:
(1) JAVASCRIPT:OpenWin('','','600','450','na+me+lo+sc+re+st+',true,0,0,true);void('')
(2) JAVASCRIPT:OpenWin('','','600','450','na+me+lo+sc+re+st+',true,0,0,true);void('')
(3) JAVASCRIPT:OpenWin('','','600','450','na+me+lo+sc+re+st+',true,0,0,true);void('')
Copyright 2006 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit