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The CPI is the Consumer Price Index.

It is a measure by the BLS (Bureau of Labor Statistics) to measure Inflation.

In the 1880's the Bureau of Labor was asked by Congress to measure the impact of new tariffs on domestic prices.  By World War I that measure started to resemble today's CPI and was used for setting wage increases for shipbuilders.  It has been published regularly since 1921, but it wasn't until the 1940's that union contracts started including it for COLAs (cost-of-living adjustments).

These days, the CPI is used for more things: Inflation-Indexed Treasury bills, COLAs for social security, computing GDP net growth, etc.

(skip past the orange hamburger to continue with Greenspan and monkey business)

Because the CPI was the core measure of many things with many implications, it became an easy target for manipulation.

There were arguments in the media in the early 1990's that the CPI was overstating inflation -- chief among them was Michael Boskin (chief economist to GHWB) and Alan Greenspan (Mr. Andrea Mitchell) then Chairman of the Federal Reserve Board.

Prior to the Boskin/Greenspan adjustment to CPI calculation, the CPI was measured by looking at the costs of a fixed basket of goods.  An identical 'basket of goods' (a term you'll be seeing a lot in this diary) was priced at current market prices for each calendar period and the changes in that cost would represent the rate of inflation.  Simple.

Boskin/Greenspan argued that when steak got to be too expensive, people would substitute hamburger for the steak and that this "substitution" would reduce the effective inflation rate.  [Actually that substitution would hide actual inflation by some 4% and instead we would get a steadily declining standard of living at 4% per year.]

There was significant pushback against the concept at the time and you can do a search for "Greenspan" "Hamburger" and "Steak" to see what I mean.

Shortly after Clinton took office in 1993, this changed.  The BLS started weighting the items in the basket of goods to make the CPI rate of growth lower.  Then they switched to a geometric weighting, and this was a big change.  With a geometric weighting, items that are rising in price more will have a lower weight and items that are essentially the same will have a higher weight.  The net effect of geometric weighting is approximately 2.5-3% per year in understating inflation.

Combining the Boskin/Greenspan adjustment (substitution within a 'VARIABLE basket of goods') with the BLS geometric mean approach, Inflation as measured by the CPI can now be understated by up to 6-7%, depending upon the circumstances.

In effect, we were able to export inflation throughout the late 90's and early 00's.  This is witnessed by the differences in the price of the Euro shortly after its inception ($0.82) vs. today ($1.32).  We have silently inflated our currency, and being the reserve currency of the world it has allowed us to expand our money supply without experiencing overt inflation.

Or have we experienced overt inflation?

Since the early 1990's the old-CPI has outpaced the current "substitution"-CPI by 35-50%.  Grandma gets 35-50% less (compared to that fixed basket of goods) than she got at the start of the Clinton era.

And we've been able to show GDP growth -- lots of it in the late 1990's, while not scaring anyone with high rates of inflation.  

In fact wages have also fallen -- and this is seen by the decline in median wages, especially with respect to the poverty line.

We already face a CPI crisis.  Our seniors have been seriously hurt, as have many others that are linked in one way or another to the CPI.

Food for thought: Obama [reportedly] wants to switch to a "chained-CPI" with understates inflation to an even greater degree.  This means he wants to have a larger amount of inflation without having to declare it, but also that anyone or anything that is linked to that measure is going to be devalued over time.

This is BAD for our seniors, this is BAD for our country, and social security is only the tip of the iceberg.  Tell this story to the hard-currency nuts and you'll get an even bigger tale of woe.  [If you can stand listening to it.]

Originally posted to polecat's smelly patch on Wed Dec 19, 2012 at 01:28 PM PST.

Also republished by Community Spotlight.

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Comment Preferences

  •  The ironic thing is that there is a CPI-E (20+ / 0-)

    for seniors, but they claim it is 'experimental'  per the NYT this morning and won't use it.  After this there will be no experimenting or vetting because the gain for the pork barrelers is so great, and the ideology of making the Dems be the ones who supposedly cut benefits is so politically profitable.

  •  This impacts a LOT of people. (18+ / 0-)

    Like you said, Social Security is only part of it.  It hits military retirees, Federal retirees, probably current Federal employees and military members, and to a lesser degree, taxes paid by all Americans:

    Consider a typical household earning between $30,000 and $50,000. Ten years from now, a household with that same income would be paying about $125 more in federal taxes, according to calculations by the nonpartisan Tax Policy Center.
    •  I realize that my experience doesn't (11+ / 0-)

      totally deserve my saying it is a "Universal" - but I run a small business. Right now, my customer base is comprised of these two markets:

      One) People in China, and the Far East. Wages are exploding, the middle class is growing, and people want to buy my books,
      Two) Those who are on pensions and/or Social Security. They have paid off their home mortgages, and can spend some of their money.

      Now if what I see is also true across the board, that granma has some discretionary monies, and can buy her grand kids new shoes, that she can loan her grand daughter college tuition, or help make a housing payment occasionally, then this three percent is demonstrated across the board. Dollar X Y and Z go out to affect not only the original person, ie, granma, but her grand kid, the shoe store owner, the credit union  that holds the daughter's mortgage, etc.

      Cut back these monies and let the Upper Two Percent have the monies instead, and our economy won't see the money. At least not the economy here on Main Street. So the overall economy might very well shrink down another two or three percent. For no good reason, other than that is what the Elite wants to have happen - to shrink down the Main Street economy.

      Offer your heart some Joy every day of your life, and spread it along to others.

      by Truedelphi on Wed Dec 19, 2012 at 07:09:09 PM PST

      [ Parent ]

  •  There has been a lot of inflation in food (35+ / 0-)

    in medical expenses, and in many other things that are not reflected in the current CPI.

    Economics is a pseudoscience which generates propaganda for the rich.

    •  Well, as for food there is always eating the (6+ / 0-)

      rich.  Gated communities = ration storage, just avoid the brain and other nervous tissues.

      /snark? (you decide)

      You have watched Faux News, now lose 2d10 SAN.

      by Throw The Bums Out on Wed Dec 19, 2012 at 05:20:50 PM PST

      [ Parent ]

    •  I Believe Our Income Tax Schedules (10+ / 0-)

      Are also linked to the Bureau of Labor Statistics CPI numbers, which would mean that working people would experience a hidden creep in taxes over time.

      "I'll believe that corporations are people when I see Rick Perry execute one."

      by bink on Wed Dec 19, 2012 at 05:23:35 PM PST

      [ Parent ]

    •  Funny. (0+ / 0-)

      As a Behavioral Economics student (European), who has never known anyone who treats any of the US Republican economic "policies" with something other than utter scorn, has been thought almost exactly the opposite and has always agreed with that, politically and technically:

      Your brand of economics is all-American. Own up to it and don't try and put the blame on the people who've been trying to warn you for the past six decades. But nah, we're just inconsequential socialists here, what do we know about the "pseudoscience" of economics?

      John Maynard Keynes, Brit and the founder of modern economics, did everything to prevent the American "model" - ie. the preposterous ideas of cuts during recessions, deregulating or leaving any market unregulated, no international accountability, no uniform federal policy on worker's rights or much else to do with the economy, no constitutionally agreed union rights, little discrimination laws, sticking heads in the sand when a recession looms - from taking over. He was the original anti-austerity and "demand is key, not supply" guy and he created the entire theory upon which 20th and 21st century economics is based and upon which Americans have always relied to enact the exact opposite.

      In the 1920s, Keynes was seen as anti-establishment and was mainly attacked from the American right because orthodox economic policies would be subjected to much more regulations, taxation and control (sound familiar?). He predicted hyperinflation (aka the Great Depression) and was a worker's rights man the likes of which doesn't seem to exist today.

      When the war was almost over, Keynes was heavily involved as leader of the British delegation and chairman of the World Bank commission in the 1944 negotiations that established the Bretton-Woods system. Keynes proposed a plan that argued for the creation of a common world unit of currency and new global institutions – a world central bank and the International Clearing Union to manage an international trade and payments system with strong incentives for countries to avoid substantial trade deficits or surpluses (sound familiar?).

      America being the world's biggest creditor (especially of the invaded and destroyed countries) meant that the final outcomes were the conservative plans of American economist Harry Dexter White instead of Keynes' plan. On almost every point where he was overruled by the Americans, Keynes was later proved correct by events.

      The two new institutions, later known as the World Bank and International Monetary Fund (IMF), were founded as a compromise that primarily reflected the "American vision". There would be no incentives for states to avoid a large trade surplus. Instead, the burden for correcting a trade imbalance would continue to fall only on the deficit countries, which Keynes had argued were least able to address the problem without inflicting economic hardship on their populations.

      In the seventies Robert Kuttner wrote The American Prospect in which he argued that the breakdown of the Bretton-Woods system of capital controls, which allowed capital flight from regulated economies into unregulated economies, was part of the cause of the economical difficulties that decade. Peter Pugh, historian, stated that a key cause of the economic problems afflicting America in the 1970s was the refusal to raise taxes to finance the Vietnam War if they insisted on invading or to stop said invasion from happening in the first place (which was Keynesian advice). Sound familiar?

      You can blame Ayn Rand among other American "economists" for shaping your country into a bubble of contradicting yet meaningless cash-grabbing free-market policies that were and still are utterly irresponsible to force on any citizen in a civilized society. Even Adam-the-invisible hand-guy-Smith (Scottish) included provisions for relative control over industries by the government. This was the 18th century. He would've been appalled, to say the least, to see what the US ultimately did with his theories.

      US economics has always made a mockery of the science of economics. You, my friend, are talking about American politics/political economics and nothing else.

      “Markets can remain irrational longer than you can remain solvent.”
      “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
      ― John Maynard Keynes
  •  Solid if dismaying explanation of CPI in general (12+ / 0-)

    and how its distortions are "supposed" to work. Thanks for this. But as a macroeconomic novice, I have to ask why is it to anyone's advantage to understate inflation? I can certainly see why it's been to the 99%'s disadvantage to lowball it all these years in terms of increases in payouts; is that the sole advantage it confers on the wealthy? I guess that's probably enough....

    I have only one suggestion to make regarding your diary. Besides IDing Greenspan as Mr. Mitchell, I'd like to see his name always linked with Ayn Rand. Maybe Ayn Rand Jr.? Something more clever must already have been coined.

    Some DKos series & groups worth your while: Black Kos, Native American Netroots, KosAbility, Monday Night Cancer Club. If you'd like to join the Motor City Kossacks, send me a Kosmail.

    by peregrine kate on Wed Dec 19, 2012 at 05:43:36 PM PST

  •  The Cliff (5+ / 0-)

    In the words of Margaret Thatcher, "This is no time to go all wobbly".  Mr. President, stand up for those who elected you!

    •  Funny that you would mention Thatcher - (4+ / 0-)

      She ran for the office of Prime minister, and it was a historic election, due to her gender. Her campaign slogan was "Hope and Change." And she won her election.

      Offer your heart some Joy every day of your life, and spread it along to others.

      by Truedelphi on Wed Dec 19, 2012 at 07:11:16 PM PST

      [ Parent ]

      •  but by some sources (0+ / 0-)

        she started the Falkland Islands war to boost her chances at reelection (and succeeded; she looked like she would lose the election before it started).  I don't see Mr. Obama doing that for some reason.

        How is taking a hundred dollars worth of food from hungry kids or from old poor sick people equal to taking a hundred dollars from billionaires? -- howabout, 19 Dec 2012

        by billlaurelMD on Thu Dec 20, 2012 at 09:46:18 AM PST

        [ Parent ]

        •  I didn't say I approved of Thatcher (I don't) (0+ / 0-)

          I just was pointing out how Obama's slogan had been used before. And just as those in Britain who were steeped in progressive and liberal ideals voted in Thatcher, so did those of us who thought "Hope and Change" were needed and would happen if the Dems took the WH back from the Republicans, voted for an unknown black guy, who then proceeded to ignore many of the fine things he campaigned on.

          Offer your heart some Joy every day of your life, and spread it along to others.

          by Truedelphi on Sat Dec 22, 2012 at 01:16:12 PM PST

          [ Parent ]

  •  Yet another problem for seniors (27+ / 0-)

    Interest rates.  They are so low that even if you saved your own money you can' t generate sufficient money on your savings.  Given this sort of economic environment, chained CPI would be a huge blow.

    "The real wealth of a nation consists of the contributions of its people and nature." -- Rianne Eisler

    by noofsh on Wed Dec 19, 2012 at 06:09:47 PM PST

    •  So true, (4+ / 0-)

      I was just talking about this with my 80 year old Mother because my Grandmother actually was able to live well off of the interest of their investments.  Of course that interest is no longer collecting like it did during my Grandmother's time so living on collected interest is not an option for my parents.  But they were still able to get ahead for their retirements and they live quite carefully on Social Security.  But, now this will be another blow to the quality of life for many.

      I remember the days when we actually worried about the quality of life people had.  

      "During times of universal deceit, telling the truth becomes a revolution­ary act. " George Orwell

      by zaka1 on Thu Dec 20, 2012 at 12:52:18 AM PST

      [ Parent ]

  •  This makes no sense (5+ / 0-)

    You are claiming that the CPI (which has averaged about 3% for the past 25 years or so) understates inflation by 6-7%.

    If inflation is 3%, that implies that prices would double approximately every 24 year.  If inflation is 9-10%, prices would be doubling every 7 to 8 years.  If prices doubled every 8 years, that would be 3 doublings in the past 24 years--i.e., prices would be 8 times higher.  Having been a consumer for the past 24 years, I can say without fear of contradiction that prices and wages have not octupled in the past 24 years (or, put another way, the cost of items 24 years ago was not one-eighth of what it is today).

    "Well, I'm sure I'd feel much worse if I weren't under such heavy sedation..."--David St. Hubbins

    by Old Left Good Left on Wed Dec 19, 2012 at 07:05:25 PM PST

    •  I said "up to 6-7%" ... But there is evidence that (2+ / 0-)
      Recommended by:
      enhydra lutris, TheSpectator

      Inflation has been understated... That a doubling since '93 has been ignored.  72/20 is about 3.6%. (Rule of 72)

      Happy little moron, Lucky little man.
      I wish I was a moron, MY GOD, Perhaps I am!
      —Spike Milligan

      by polecat on Wed Dec 19, 2012 at 08:51:49 PM PST

      [ Parent ]

      •  Even that more modest claim (5+ / 0-)

        would indicate a quadrupling of prices.  My 1993 minivan ($20,000 when new) is not $80,000.   Milk wasn't 50 cents a gallon in the nineties, and hamburger wasn't 99 cents per pound.  The house I bought in 1990 isn't worth four times as much.  And I'm sure as hell not making four times as much.

        "Well, I'm sure I'd feel much worse if I weren't under such heavy sedation..."--David St. Hubbins

        by Old Left Good Left on Wed Dec 19, 2012 at 09:13:48 PM PST

        [ Parent ]

      •  So, which specific years... (2+ / 0-)
        Recommended by:
        FG, Justanothernyer

        ...was it understated by as much as 6-7%?  Because "up to 6-7%" means that inflation has been understated by that amoutn at least once.

        And what is the average amount that it has been understated over the past twenty years?

        Seriously, while there are some real problems with the CPI (medical costs are underweighted, and so-called "hedonistic adjustments" mean that some of the items in the basket used for CPI may not realistically reflect what is available today, to cite two examples), I suspect that you're significantly overstating the case.

        To get a feel for official inflation rates, I tried plugging some numbers into an inflation calculator.  Doing so tells me that prices per the CPI increased 62.6% over twenty years (1991 to 2011, since 2012 is not yet in the calculator website that I used) and 143.6% over thirty years.  At the "gut level", those increases feel about right to me overall -- ie, those numbers come reasonably close to reflecting how much I feel the purchasing power of my money has deteriorated over the years.

        Political Compass: -6.75, -3.08

        by TexasTom on Thu Dec 20, 2012 at 07:24:22 AM PST

        [ Parent ]

    •  It actually means a percent of a percent... (0+ / 0-)

      I believe.  So if prices increased by 1%, and you underestimate that by 6%, you estimate an increase of 0.94%.

      That doesn't seem like much, but let's assume 3% actual inflation (2.84% estimated).

      Over 20 years, the difference would be 1.03^20 - 1.0284^20 = 0.05 = 5%.

      The claim is made that there's a reduction of 35-50% over the past 22 years.  That would require either more than 3% inflation, or being more than 6% off.

      Assuming 3% inflation, we'd have:

      1.03^22 - x^22 = 0.35

      x^22 = 1.56

      x = 1.0205.  So assuming a real annual inflation of 3%, the estimate would have to give a prediction of about 2%, which would be understating inflation by a third (33%).

      •  Oops...There's a bug there. (1+ / 0-)
        Recommended by:

        Actually that was 35% difference of current income.

        You'd actually want 1.03^20 / 1.0284^20 - 1 to get percent of the lower inflation-based value, I'd think.

        First value would be 3% off after 20 years.

        The second calculation would get you:

        (1.03 / x)^22 = 1.35

        x = 1.016, so you'd need to be off by about 50% annually (Less with higher inflation.  More if I look at it as 35% relative to the higher scheme, rather than the lower one)

    •  Prices on what? Much has gone up that much (0+ / 0-)

      or more since 1988, much hasn't and some has dropped.

      That, in its essence, is fascism--ownership of government by an individual, by a group, or by any other controlling private power. -- Franklin D. Roosevelt --

      by enhydra lutris on Thu Dec 20, 2012 at 09:45:21 AM PST

      [ Parent ]

  •  Low inflation is good for creditors. (1+ / 0-)
    Recommended by:

    Hiding that is bad for citizens.

    Democracy - 1 person 1 vote. Free Markets - More dollars more power.

    by k9disc on Thu Dec 20, 2012 at 05:32:18 AM PST

  •  Thanks for an easy to understand diary (3+ / 0-)

    I've been saying this for years, but everyone accuses me of konspiracy theory.

    ¡Cállate o despertarás la izquierda! - protest sign in Spain

    by gjohnsit on Thu Dec 20, 2012 at 06:15:47 AM PST

  •  The problem with this numbers game is..... (3+ / 0-)
    Recommended by:
    vigilant meerkat, polecat, MKinTN

    .... real people living in the real world will eventually STARVE to death, if this idiocy is allowed to continue for years to come.

    Obama proves once again, he was a lesser of two evils, not a great President or a great man, and he is by no means an actual Democrat. Such a shame.

    Eventually it becomes such a farce it has no meaning and the "correction" when it comes will be one whopper of a an adjustment.

    So the real sport in D.C. now is, who can cook the books the most, and hopefully stick the "next guy" with the blame.

    If I were Hillary, and considering 2016, I'd have to start attacking Obama and Congress equally.... NOW!!

  •  Thanks for explaning this to the clueless (1+ / 0-)
    Recommended by:

    like myself.

  •  I think we should tone down the hyperbole (1+ / 0-)
    Recommended by:

    I don't support the current proposal of changing to a chained CPI for Social Security.

    However, from my understanding, the net effect is sub 1% decrease in inflation adjustment.

    It's not exactly "starving Grandma." Nor is the mere idea of it the greatest betrayal ever.

    The truth is, on its current funding mechanism and given its current trajectory, Social Security will not be able to pay out promised benefits indefinitely. The extent of that problem, and the actual reduction in benefits that would occur once if the trust fund was exhausted, is much greater in magnitude and potential damage  than the current discussion about CPI. It is tragic that we have had multiple administrations of both parties that were unable to deal with this.

    I'd like to see some focus on this bigger issue.

  •  What are the items in the basket (0+ / 0-)

    these days that determine CPI these days.?

    •  I lost track (0+ / 0-)

      but the fact the CPI and inflation rates over the last ten years, should have prices around half of what they really are.

      In other words, our inflation has been hidden since the late 90's to protect the banks and investor class.

      GOP- Fact Free since 1981!

      by KingGeorgetheTurd on Thu Dec 20, 2012 at 10:06:16 AM PST

      [ Parent ]

  •  shouldn't CPI be weighted not by price increase (1+ / 0-)
    Recommended by:

    but by proportion of budget for a particular income class?  The removal of "volatile" food and energy prices from the core CPI always burns my bum.  What's more core to the middle class and poor than food and energy prices? I can't think of anything other than housing .... and that's been monkeyed with as well.

    How is taking a hundred dollars worth of food from hungry kids or from old poor sick people equal to taking a hundred dollars from billionaires? -- howabout, 19 Dec 2012

    by billlaurelMD on Thu Dec 20, 2012 at 09:48:38 AM PST

    •  That's only one version of the CPI (0+ / 0-)

      and it isn't used to adjust social security.  The so-called "core" CPI is used principally by the fed in setting monetary policy.  The CPI used for social security most definitely includes energy and food.

      "Well, I'm sure I'd feel much worse if I weren't under such heavy sedation..."--David St. Hubbins

      by Old Left Good Left on Thu Dec 20, 2012 at 02:16:35 PM PST

      [ Parent ]

  •  I miss the "marketbasket" of items (0+ / 0-)

    that used to be used.

    How is taking a hundred dollars worth of food from hungry kids or from old poor sick people equal to taking a hundred dollars from billionaires? -- howabout, 19 Dec 2012

    by billlaurelMD on Thu Dec 20, 2012 at 09:49:58 AM PST

  •  Inflation for elderly HIGHER than CPI. (1+ / 0-)
    Recommended by:
    the BLS also calculates the Experimental Price Index for the Elderly (CPI-E) for reference purposes weighted to the basket of goods consumed by the elderly and finds that these prices generally rise faster than the regular index. Grandma buys a lot of health care services and isn’t so interested in the falling price of an iPad 2.

    "The true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals." - Barack Obama

    by HeyMikey on Thu Dec 20, 2012 at 10:10:20 AM PST

    •  That is false (0+ / 0-)

      The CPI-E has increased less than the CPI-W for the past several years.

      "Well, I'm sure I'd feel much worse if I weren't under such heavy sedation..."--David St. Hubbins

      by Old Left Good Left on Thu Dec 20, 2012 at 10:32:35 AM PST

      [ Parent ]

      •  Long term vs. short-medium term. (1+ / 0-)
        Recommended by:
        From December 1982 through December 2011, the all-items CPI-E rose at an annual average rate of 3.1 percent, compared with increases of 2.9 percent for both the CPI-U and CPI-W. There are several reasons that older Americans faced slightly higher inflation rates over the past 29 years. First, older Americans devote a substantially larger share of their total budgets to medical care. The share of expenditures on medical care by the CPI-E population is roughly double that of either the CPI-U population or the CPI-W population. In addition, over the 1983–2011 period, medical care inflation increased significantly more than inflation for most other goods and services (5.1 percent annually for medical care, compared with 2.8 percent for all items less medical care). Second, older Americans spend relatively more on shelter, and during the last 29 years shelter costs have modestly outpaced overall inflation.

        Although the CPI-E generally outpaced the official measures of inflation over the 1983–2011 timeframe, recent trends show different results. From 2006 to 2011, both the all-items CPI-E and the CPI-U rose at an average annual rate of 2.3 percent, while the CPI-W increased 2.4 percent. This turnaround was caused primarily by changes in the relative inflation rates of medical care and shelter, compared with the overall inflation rate. Specifically, the gap between medical care inflation and overall inflation has generally fallen since 2005, and shelter inflation has been rising slightly more slowly than overall inflation over the 2006–2011 period.

        The reason for falling shelter costs 2006-11 is almost certainly the bursting of the housing bubble.

        "The true strength of our nation comes not from the might of our arms or the scale of our wealth, but from the enduring power of our ideals." - Barack Obama

        by HeyMikey on Thu Dec 20, 2012 at 10:44:44 AM PST

        [ Parent ]

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