CPI: Official Inflation (And Its Flaws)
CPI Understates Real Inflation
📊 What Is CPI?
Basket of Goods
Average consumer spending
Method
Headline vs Core
Core excludes food & energy
YoY vs MoM
Year-over-year vs monthly
⚠️ Flaws
Substitution
Steak → chicken
Hedonic Adjustments
Better TV = “lower price”
Owner's Equivalent Rent
Survey estimate
Weighting
Underweights housing/education
📈 What You Feel
Housing
+8-15%/yr
Biggest Cost
Healthcare
+5-12%/yr
Education
+6-10%/yr
Food/Energy
+8-20% swings
🔧 What To Do
Track your personal inflation
Budget + category changes
Reality
Negotiate raises above CPI
Ask for 7-10%
Lock-in costs
Fixed-rate mortgage
CPI Methodology (Quick)
- Bureau of Labor Statistics surveys prices across categories
- Weightings reflect average consumer spending
- Core CPI excludes food & energy (volatile)
- Hedonic adjustments reduce price if quality improves
- Owner’s Equivalent Rent estimates what owners would pay to rent their own homes
Why CPI Understates Reality
- You can’t “substitute” rent with a cheaper rent in a different city
- Your out-of-pocket healthcare costs aren’t offset by “quality improvements”
- Housing is underweighted despite being your biggest expense
Better Ways To Measure Your Inflation
- Track your actual expenses month-to-month
- Look at category-level changes (housing/food/energy/healthcare)
- Calculate your personal YoY inflation: (This year spend - Last year spend) / Last year
CPI vs Real Inflation (Examples)
| Category | Official CPI | Real-World Increase |
|---|---|---|
| Rent | 6% | 10-15% |
| Healthcare | 3% | 6-10% |
| Tuition | 4% | 7-9% |
| Groceries | 5% | 8-12% |