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CONSUMER PRICE INDEX Several years ago, the federal government discovered that the CPI had been "overstated" by about 1.5 percent. That’s a big problem for people whose income is linked to the CPI -- people with employment contracts with a pay escalator based on the CPI; Social Security recipients, union members whose wage rates are linked to the CPI. Employers (and employees) should be wary about the government's CPI. It is NOT a reliable economic indicator. (Retailers, take note -- you might want to do a bit of "customer education" and "employee enlightenment" about this.) The Bureau of Labor Statistics (BLS) had repeatedly said that the CPI is not a TRUE measure of the cost of living. But unions and the media don’t want to hear that. Meantime, employers who try to keep pace with the CPI in the name of adjusting to the "cost of living" are paying more than they should. The CPI was created in the early 1900s to measure changes in the price of 398 common goods and services. The CPI is a barometer that records changes on the cost of the listed 398 items -- not what it actually costs to live. Over the years, government bureaucrats, unions and the news media have made everyone believe that the CPI is a major economic indicator. It isn’t and here’s why: 1. The CPI is outdated before anyone knows what it is. The baseline for the current CPI was developed between 1982 and 1984, but it wasn’t put into effect until 1987. No one still spends money the way they did back then. We didn't have Vista laptops and ISPs, cell phones were the size of bricks, and gas was around forty cents a gallon. Remember? 2. The CPI is a single index of only 12 cities, not the whole country. The government averages all of the cities into a single CPI. Thus, the CPI becomes meaningless in Miami, Seattle, Hawaii, Guam or Ponape. 3. There is no consistency in CPI measurement. Chicago’s CPI is measured monthly. Milwaukee, 79 miles north of Chicago, gets their CPI measured semi-annually. Prices can change a lot in six months. 4. Another inconsistency: the salary amounts used in determining what the CPI calls "highly compensated" and "super-highly compensated" employees were $66,000 and $99,000 in 1993. What are you making today? Congratulations! 5. Property and income taxes are not factored into the CPI. If you move from one county to another within your state, and your property taxes increase by $2,200 a year, your family’s cost of living has gone up -- even though you have not changed your daily or weekly spending habits. The CPI makes no allowance for this. 6. Not all of the workforce is affected by the CPI. More than 80 million people are not in the workforce but their benefits rise with each up-tick of the CPI. Who are they? Folks on Social Security, welfare recipients, the military, federal employees (both active and retired), members of Congress, farmers and the self-employed. If there is this kind of inaccuracy in the CPI that is measured by the BLS in the mainland -- how good could a CPI from the local government be? Not only are CPIs inaccurate, there are other factors to consider when calculating the cost of living: (1) we don’t buy houses and cars every month; (2) when we buy goods and services we take advantage of sales and discounts; (3) when beef prices go up, we buy chicken instead or order from the Dollar Menu at the golden arches. If you must try to use the CPI, use the CPI-U numbers (those figures covers about 80 percent of those who work in the private sector ) -- then deflate it by 30-35 percent. The resulting number will be close (not accurate, but close) to a true measure of the increases in the cost of living. |