Calculating the Consumer Price Index (CPI) for Dummies and finding out the Real Inflation Rate is 14%!

We all get frustrated with the bogus government inflation, unemployment and other numbers feed to us by various government agencies with a vested interest in making the boss look good. Today lets look at the consumer price index or CPI. This is one of the most reported statistics and most political. As pointed out in a previous blog it lead to the election loss of Jimmy Carter and eight years of Ronald Reagan.

Consumer Price Index

So how does it all happen?

The Bureau of Labor Statistics (BLS) surveys 30,000 household on their spending habits. The results are used to construct a “market basket” of typical goods and services for a urban family of four. In December of 2008 this survey was as follows:

Food and beverages 15.8%
Housing 43.4%
Apparel 3.7%
Transportation 15.3%
Medical care 6.4%
Recreation 5.7%
Education and communication 6.3%
Other goods and services 3.4%

Okay now where do I get the inflation numbers for this basket of goods? Why the St. Louis Federal Reserveof course. The common practice is for the BLS to “chain” dollars to 1982-84 = 100. Why 1982-84? Who knows? It’s what my geometry teacher use to call arbitrary but fixed. That means once you put your dot or line on the paper everything related to it better be perfect, or else! Anyway…

So what you want to do is to use your old high school percent change formula (new number – old number / old number) times 100. You want to know the percent change right? Well then know the formula.

Now a example. The price of food went up from February to March from 223.779 to 225.350 so using our formula [(225.350 – 223.779)/223.779] x 100 = 0.7 or 7/10ths of 1%. Please note that there is SA or seasonally adjusted numbers and NSA or not seasonally adjusted numbers. Always choose the NSA numbers because you are interested in the month to month change or short term change.

Now we are not done yet. Most inflation rates are expressed in annual terms to make comprehension easier to understand. So take the 0.7 and multiply it by 12 (12 months in a year) for an annual rate of 8.4%. 8.4%!

Wow I do not remember that being reported in the news media.

Now after excruciating minutes of calculation we “weight” the results.

Energy prices up at a annual rate of 82.8% from February to March of 2011

Housing (2.47% annual increase based on February to March 2011)(0.434) = 1.07%
Apparel (29.6%)(0.037) = 1.10
Transportation (47.2%) (0.153) = 7.2
Medical care (2%) (0.064) = 0.128
Recreation (0.83%) (0.057) = 0.47
Education (-0.92%)(0.063) = -0.06
Food (8.4%)(0.158) = 1.33
Energy (82.8%)(0.034) = 2.8

Please note that as of 2008 “energy” is not in the CPI “basket of goods” so I substituted “other goods and services” for energy. One wonders the wisdom of this “basket of goods.” Even so giving energy a miniscule weight of only 3.4% of our basket of goods we fine the inflation rate is a astonishing 14.04%!

Even a look at the BLS own report for price increases from February to March shows a astonishing 11.7% annual increase in prices.

Ladies and gentleman welcome to the bursting of the dollar bubble. All that cheap borrowed money for “social justice” is going to impoverish all those who voted for Obama. How appropriate but unfortunately the rest of us have to suffer along with the political/economic illiterates of America.