Inquiring minds are asking "What is the Real CPI?" It's a good question, too. However, you can find many widely differing opinions. For example, you will get one answer from the government, a different answer from sites like Shadowstats, and a third opinion from me.



First let's look at John Williams' Shadowstats .







That's an interesting chart, especially given the hyperinflationary bent of John Williams. He pegs the CPI at 2% as of May 2009 and had it at 9% mid-2008 and right around 5% in 2007. In contrast, the official CPI was 5.5% in mid-2008 and 2+% in 2007.



The problem will all of those numbers is they fail to properly take housing into consideration. And housing has been falling like a rock.



Should housing be in the CPI? How?



Bear in mind the government considers housing a capital good not a consumption item. Based on the idea that one would be renting a house if one did not own it, the government uses Owners Equivalent Rent (OER) and not housing prices in the CPI. OER is the largest component in the CPI.



By the same measure one might argue that lawn mowers and automobiles are capital goods. Lawn mowers are durable, not immediately consumed, and if one owns buildings and uses lawn mowers to maintain their properties (or if one hired someone to cut their lawns for them), the mowers would indeed be depreciated over time as a capital expense. The same logic also applies to auto leases.



Let's explore this from a practical standpoint starting with theory.



Consumer Price Theory and Practice



Here are a few excerpts of note from the Consumer Price Index Manual, Theory and Practice By Ralph Turvey.



Page 47: The treatment of owner occupied housing is difficult and somewhat controversial. There may be no consensus on what is the best practice. The distinctive feature is that it requires the use of an extremely large fixed asset in the form of the dwelling itself.



Page 147: The treatment of owner-occupied housing is arguably the most difficult issue faced by CPI-compilers. Equally important it may be difficult to identify a single principal purpose for the CPI.



In particular, the dual use of CPIs as both macroeconomic indicators and also for indexation purposes can lead to clear tensions in designing an appropriate treatment for owner-occupied housing costs.

Case Shiller CPI vs. CPI-U

CS-CPI Year over year has now fallen for 8 consecutive months and 11 of the past 15. High Year over year comparison data points for the next several months will likely result in CPI deflation coming in at -7% to -8% in the coming months.

Case Shiller CPI vs. Shadowstats

A Practical Matter

By ignoring housing prices, CPI massively

understated

inflation for years and the CPI is massively

overstating

inflation now. Thus, as both theoretical and practical matters, Greenspan and Bernanke blew it by failing to take housing prices into consideration.