Measuring inflation needs a makeover, new report has ideas

• There's an effort underway to revamp the data collection process behind the CPI. And it couldn't come soon enough.

The backstory: Released monthly by the federal government's Bureau of Labor Statistics (BLS), the CPI measures the change in the price of a basket of commonly used goods and services.

• The CPI figures are used in all kinds of important ways: Making adjustments to people's Social Security payments, rent prices and wages; the Treasury even issues bonds indexed to inflation.

Driving the news: A 146-page report sponsored by the BLS lays out a plan to bring the CPI into the 21st century. More than two years in the making, the report was released last month by a panel of experts — prominent economists, policy makers, statisticians — assembled by the National Academies of Sciences, Engineering and Medicine.

• It's not unusual for the BLS to update and refine the way it collects data for the CPI, but this proposal is different.
• "This is a fundamental change in the whole framework for thinking about how to measure inflation," said Daniel Sichel, the chair of the panel and an economist at Wellesley College who spent 20 years at the Federal Reserve.

State of play: This report was commissioned before the pandemic, but COVID only amplified its urgency.

• The CPI couldn't keep up with the radical shift in consumer behavior during COVID. Almost overnight, we stopped spending money on services — dining out, plane tickets, etc — and everyone was hot for new laptops, home renovation and whatever else we could order on Amazon.
• The balance of goods in the average American's monthly shopping basket changed a lot — but the CPI's basket didn't instantly adjust, leading to some mis-measurement of overall inflation, Sichel says.

Details: The changes recommended by the panel fall into a few broad categories. There are two worth emphasizing:

Using new data sources: Right now the BLS assesses the prices of goods using surveys, but the authors of the report recommend pulling in Big Data. Other countries are already doing this, automating data scrapes from big retailers or credit card companies, for example.

• This is critical because response rates to these surveys have plummeted in recent years.

Measuring CPI by income group: Economists are starting to consider the idea that folks at the lower end of the income scale face higher rates of inflation.

• It makes intuitive sense. The less money you make, the higher percentage of your income goes to food and fuel — where prices are skyrocketing right now.
• Plus, high income households might be more able to take advantage of certain types of bulk discount products or warehouse purchases that lower-income people can't.
• The report suggests looking at a way to calculate different CPIs for different income groups — to gain a better understanding of how this works and, possibly, to change the way the government makes inflation adjustments to Social Security and other types of benefits.

What's next: The BLS already made one change. Starting in January 2023 it will shorten the timeframe in between updates to the weights in the basket.

• As for the rest, it's a work in progress. The agency has said it was aiming to use nontraditional data sources by 2024, and generally agreed with the panel on the need use to use more alt data, in a blog post.
• The agency called the report "a valuable guide to help us keep improving and continue to produce gold standard data well into the future."

The bottom line: As the report says, the case for modernizing the CPI is "urgent, compelling and feasible."