Inflation is soaring through the American economy. This is obvious to anyone who buys gas, goes to the grocery store, or eats out in a restaurant.
According to the latest data, the consumer price index went up 7.5% in January from one year ago. This is the fastest increase since February 1982, when inflation hit 7.6%. The Consumer Price Index (CPI), measures a variety of goods ranging from gasoline and health care to groceries and rents. This index rose 0.6% in the one-month period from December.
Many federal employees and retirees are more familiar with the CPI-W index as that index is the one used to calculate the amount of the COLA that will be paid starting in January 2023. The CPI-W index is now up 8.2% over the past 12 months.
And, while Americans were initially assured that the surge in inflation was transitory, reality demonstrates it was not transitory and is actually going higher. According to the Bureau of Labor Statistics, the producer price index is surging ahead. This index measures inflation at the wholesale level (before it reaches consumers). This index surged 9.7% in January from one-year earlier. Prices rose 1% just in January on a monthly basis—considerably above the revised gain of 0.4% in December.
In other words, consumers are paying more for everyday necessities, including groceries, gasoline, and cars.
Inflation Highest in 40 Years—Actually Much Worse Than That
FedSmith has noted earlier that the current rate of inflation is the highest it has been in forty years. The reality is probably worse than that dramatic figure.
The last time an annual COLA was higher than the 2022 increase of 5.9% was in July 1982. In 1982, the COLA was 7.4%. For those with an eye on history, President Carter left office in 1981. The largest COLA was in 1980 when he was still in office. In that year, the COLA hit 14.3%. The average rate of inflation in 1980, measured on a monthly basis, was 13.50%.
By comparison, the CPI-W inflation figure, the figure used to calculate the annual COLA increase and Social Security increase paid in January 2022, was much less than 13.50%. So, while the 5.9% COLA increase was considerably higher than the 2.7% annual federal pay raise, the CPI figures do not reflect the actual changes in inflation since 1980.
Follow the Money
“Follow the money” is a common phrase popularized by a 1976 film entitled All the President’s Men. It suggests political corruption can be brought to light by examining what is transferred between interested parties.
The same method works for looking at the CPI and how it is changed.
Not to be too cynical, but the reality is the federal government has incentives to report inflation that is lower than what people actually experience in their expenses. The CPI is used to increase government payments incomes for millions of Americans. The higher the CPI numbers, the more the government will spend in the near future on these income payments to keep up with the cost of living.
For example, CPI data is used for calculating increases in payments to Social Security beneficiaries, food stamp recipients, military and federal Civil Service retirees and survivors, and children on school lunch programs.
The CPI actually measures a range of consumer spending. The CPI is perhaps one of the most important government statistics because it affects a number of public programs and is used as a benchmark to set public policy. The accuracy of this measurement is open to question and government agencies even use different ways to measure inflation which can yield different results.
How CPI Measurement Changed
For many years, consumer inflation was estimated by measuring price changes in a fixed-weight basket of goods. In other words, it measured the cost of living for maintaining a constant standard of living for an individual or a family.
Over time, a new theory emerged. A family could, for example, reduce the cost of food by substituting a less expensive food product for a more expensive one. Chicken is less expensive than t-bone steak. If the price of this steak goes up and requires more to purchase than a family can or is willing to afford, they can substitute the cheaper chicken product for the steak.
Using a fixed-weight basket of goods, inflation would be measured by comparing the cost of the t-bone steak from one year to another (or another time period to an earlier time period). Over time, a different measurement evolved. In other words, comparing what a family actually spent on food from one year to the next may be the same but it is only the same because the family switched to chicken instead of eating steak. The “level of satisfaction” by the consumer may be the same despite eating less expensive food.
Maintaining a constant-standard-of-living means being able to consume the same goods in the same quantity, without having to trade-off quality versus price. Tracking the spending for lower-priced and lower-quality goods in the food basket lowers the rate of inflation and reduces the amount of money spent by the government for various programs such as federal employee retirement and COLAs.
In the 1980’s and 1990’s, the way inflation is measured by the federal government was changed. The argument was that the changes would more accurately reflect the rate of inflation by measuring the cost-of-living rather than the rise in prices of specific goods.
Here is one chart that purports to show the rate of inflation using the older method of calculation versus the current inflation measurement system:
In other words, according to this chart, inflation in 2022 is actually as high as it was in 1980. There is no way to know with certainty that the underlying assumptions in the chart are completely accurate as different methods of calculation will yield different results.
There is little doubt that the changes in calculating inflation have led to confusion but have also led to keeping government expenses lower.
For readers who think they have noticed a significant change in their purchasing power over one or more decades, despite having received an annual raise or COLA, the conclusion that your purchasing power has declined is not imaginary.
