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I would like to think that the author of the original article is uninformed, but on rereading it I think that he is trying to argue a case (poorly) rather than engaging in objective journalism.

The Consumer Price Index measures the costs of hundreds of goods bought by “an urban wage earning family of four” and combines them into a one index number. It does this by weighting each price change by the share of consumers budgets spent on each item. The fact each price is weighted by its budget share immediately explains why some prices have gone up by much more than the CPI. None of this is mentioned in the article.

The budget shares change over time, which reflects the ability, or inability, of consumers to substitute other goods. This is a basic economic concept known as elasticity of demand. Originally the budget shares were updated every 10 years, so that the CPI reflected price changes based on what consumers bought up to 10 years ago. This procedure is known as fixed weighting. In the changed methodology the article refers to, the budget shares are updated every year, which is known as chained weighting. In this way the CPI reflects price changes based on what consumers bought one year ago. It should be plain that this change in methodology improved the accuracy of the CPI. These important details are not mentioned in the article.

There are numerous factual errors in the article. For example, government contracts are tied not to the CPI, which measures the cost of goods bought by “an urban wage-earning family of four”, but to the Producer Price Index (PPI), which measures the price of commercial goods and services that businesses and the government buy.

There is also no mention of the Boskin Commission, a panel of independent economists, which found that the CPI overstates consumer prices by about one percent per year.

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