The cost of living may be rising more quickly in Cascadia than the consumer price index reveals, according to this article. The consumer price index is among the most widely quoted of economic indicators. Most people think they know what it is: an indicator of the cost of living for ordinary folks. Yet it does only a mediocre job of measuring that.

The problem may be unavoidable, because CPI is circular. It seeks to measure the changing costs not of a constant set of necessities, but of whatever average people spend their money on. It tracks a continually varying basket of goods and services. And, of course, average people adjust their spending—put different things in their baskets—in response to shifting prices.

  • That’s the cause of the CPI weakness that’s showing up right now. (There are others, believe me!) CPI estimates housing and transportation costs through an elaborate set of equations and procedures that aim to factor in such things as how often people buy new and used cars and the share of households who rent and own their homes. Housing and transportation are especially important because these categories are among the largest in most household budgets. And both are tethered tightly to interest rates.

    The historically low interest rates of the past few years induced a run on new houses and cars. The prices of rental housing and used cars stayed relatively low as a consequence. And CPI accounts didn’t keep up with all the new houses and cars going into people’s “baskets.”

    Presto! The lower-priced rental units and used cars, now overrepresented in CPI math, yield an understatement of the cost of living.

    Two conclusions:

    1. As interest rates rebound and rental and used car prices catch up, expect CPI to rise.

    2. Don’t pay too much heed to CPI. It’s a flaky number.