Consumer Price Index: Unreliable Measure of Inflation

From the Fall 2008 edition of Vanderbilt Business

Money BalloonWhen inflation is considered, those who possess a more sanguine outlook relating to pricing pressures have pointed to the Consumer Price Index (CPI) to bolster their view that inflation is not a problem.

The problem with the CPI is that consumer prices themselves transmit all sorts of information unrelated to currency strength. So while rising prices can be a symptom of inflation, they can also result from all manner of things that have nothing to do with the value of the currency.

If hotel rooms in New York City become very expensive, some would consider this an inflationary event despite simple logic showing otherwise. Put simply, if New York hotel rooms suddenly cost $200 per night more than they once did, the broad impact on the price level would be zero owing to the fact that consumers would have $200 less to spend on previously attainable goods.

Furthermore, to the extent that there is a monetary devaluation, it shouldn’t be assumed that a weaker unit of account will immediately be reflected in all consumer prices. This is because there’s a way to increase the cost of a good without increasing the nominal price of that same good. As a recent USA Today story showed, ice cream makers, suffering under rising dairy costs, have in many cases reduced the size of standard ice-cream containers to 1.5 quarts from 1.75 quarts. Frito Lay and Dial have done much the same with bags of potato chips and bars of soap.

Ultimately it has to be recognized that the only true measure of inflation does not involve prices, but instead is transmitted through the value of the dollar itself.

And when we consider the dollar, the most reliable benchmark is not the greenback’s value versus the euro, yen or pound, but the dollar’s value in terms of gold. When the price of gold moves, this is not a signal that gold’s price has changed, but instead tells us that the dollar’s value is rising or falling.

Gold has risen 255 percent against the dollar since June 2001. Whereas a dollar used to buy 1/253 of an ounce of gold, as of this writing it buys 1/900 of an ounce. For those wondering why all manner of commodities, from gasoline to corn to meat have become so expensive of late, look no further than the dollar’s debasement.

And to the extent that some have great faith in CPI-like measures, they need only look at countries outside the United States to see that our version of CPI is greatly understating true inflation. Despite the fact that the euro and pound have crushed the dollar in recent years, government inflation statistics in both show it at 16- and 18-year highs respectively.

So while inflation problems around the world confirm that our government measures of inflation are faulty, the bigger story is what a rising dollar price of gold means for the average American. When gold rises, paychecks are emasculated; investment in innovative, job-creating enterprises subsides; and money flows to the relative safety of the “real.”

Rather than clinging to the CPI as false evidence of light inflation, and worse, targeting consumer prices, monetary authorities should instead target a stable gold price with an eye on bringing it down substantially.


John Tamny is Editor of RealClearMarkets, a Senior Economist with H.C. Wainwright Economics, and a Senior Economic Advisor to Toreador Research and Trading. He can be reached at

3 Responses to “Consumer Price Index: Unreliable Measure of Inflation”

  1. Blog

    Interesting post. Inflation affects us all and we rely on the ‘experts’ to get it right!

  2. Sanford

    An often overlooked metric is the relationship between rental prices and sales prices. There was a time, and perhaps there will be again, when one could apply a simple formula of 100 times monthly rent to arrive at a house’s value. During periods of speculation, there’s a kind of disintermediation between the two. During a “correction” I believe that the idea of cap rates and gross rent multipliers will again begin to make sense.

  3. john

    Inflation is so unfair, specially in america. Our dollar is getting worth less, and our products cost more. Stupid politics. Anyways good article.

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