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Useless Consumer Price Indices - a Note

Hector McNeill1

Governments use the consumer price index (CPI) as a way to monitor inflation. However as real incomes decline the declining purchasing power has the same effect as inflation.

This note provides some observations on this matter.

Measuring what?

The CPI is a relatively useless index because it doesn't provide a means of measuring the true or real incomes status of consumers. This is because the CPI is based on statistics of transactions.

Who does and does not transact?

With increasing numbers of families resorting to food banks because of falling real incomes, these fulfillments drop out of the national stats on transactions. The increasing number of people unable to purchase food at average prices are forced to purchase lower cost substitutes. This has the effect of contributing to a lowering of the CPI. This gives the impression that real incomes have risen when in fact the reverse is the case.

The inflationary leakage, from the high inflation in asset markets, into land and real estate prices and rents have had the effect of people needing to move to smaller rental accommodations and to desist from purchasing houses. On the other hand this has the effect of giving the impression of CPI "stability" based on the actual transactions that take place. This takes no account of the failure in the market represented by millions of people having their basic preferences denied. The CPI is, in real terms, useless, but governments like to make use of this index to tell us just how well the economy is doing.

This is why a real incomes approach to the economy is of vital importance.

1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.

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