The Bureau of Labor Statistics maintains two major inflation indices, the Consumer Price Index (CPI) and the Producer Price Index (PPI). Since it is more widely used, the CPI is often criticized. I can recall several anecdotes stating that during the administration of
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hamburger replaced steaks in the CPI, reflecting a lower standard of living for Americans. (Note: unlike many polls, the poll above is entirely unscientific and placed here solely for your own amusement; it serves no other useful purpose.) Without descending too far into sarcasm, I will say that although I haven’t seen the exact details of that particular change to the CPI, it does seem reasonable that changes in the price of hamburger would more accurately reflect changes in the cost of living than would changes in the cost of steak. Note that at the time the decision was made (whenever it may have been), the re-weighting would have had 0 impact on the index reading; future changes in the price of hamburger would be reflected in changes to the index. I don’t necessarily agree with all BLS decisions, and they do update the CPI to reflect changes in lifestyle, but as a tool to measure aggregate inflation, the CPI is actually pretty solid.
On the other hand, the BLS really does make some bizarre decisions in maintaining the PPI. For example, they decided that in late 2009, consumer-grade potatoes nearly halved in their production importance:
Relative importance of component series in the Producer Price Index
by stage of processing, December 2009 1/ 02/16/10
________________________________________________________________________________________
| | | Relative importance |
| Com- | |_____________________|
SOP | modity | Index | December | December |
code | code | | (2008) | (2009) |
______|_________|_________________________________________________|__________|__________|
3111 Finished consumer foods, crude 1.751 1.993
011101 Citrus fruits 0.080 0.088
011102 Other fruits and berries 0.398 0.486
011103 Melons 0.047 0.037
011301 Dry vegetables 0.035 0.033
011302 Fresh vegetables, except potatoes 0.579 0.771
011303 Sweet potatoes 0.005 0.005
011304 Irish potatoes for consumer use 0.096 0.053
011901 Tree nuts 0.095 0.084
012101 Wheat 0.010 0.009
It’s hard to say exactly what the logic was behind this particular BLS PPI re-weighting decision. Maybe they thought that Americans were switching to a low-carb lifestyle… Perhaps they felt that changes in the price of consumer-grade potatoes had less impact on manufacturing costs than previously anticipated. That seems reasonable. But then again… why would potatoes have been weighted so much higher just a year previously? Furthermore, should tree nuts really be weighted so high relative to the other commodities? I don’t think there are satisfactory answers to these questions, but if you happen to come up with one, feel free to leave a comment.
For aggregate measures of inflation, the CPI is far superior to the PPI. I don’t generally suggest using the PPI aggregates for any purpose, although when the BLS updates the individual commodity series in a timely manner, it’s not hard to create custom price indices.
