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Where the CPI Falls Short

groceriesThe Consumer Price Index used to be a pretty good approximation for the trend in everyday prices, but it no longer is.

That’s the conclusion of a new research brief by Polina Vlasenko of the American Institute for Economic Research. AIER’s Everyday Price Index, she says, is a better way to plan a household budget, by measuring the expenses Americans pay on a regular basis.

Until 2001, everyday prices like gasoline and food, and all prices, which include major expenditures like a car or household appliances, tended to move in tandem, she said. But two factors caused these price trends to diverge, she said.

One of these is a general improvement in the quality of durable goods, especially technology, she said. When a more powerful computer sells for the same price as the previous model, that registers as a lower price in the CPI, she wrote.

Another factor is international trade. By increasing the flow of lower-priced imports, treaties like the North American Free Trade Agreement also put downward pressure on prices of durable goods, which tend to be onetime or non-recurring purchases, she wrote.

But these factors did not affect recurring, fluctuating prices like food, telephone or television service, or gasoline and home heating, she said. So the overall CPI shows lower inflation than the expenses for which Americans need to budget on a regular basis, she said.

AIER’s Everyday Price Index was designed with this difference in mind. It measures only fluctuating prices, and serves as a better barometer of prices that Americans pay regularly, she said. The next edition of the EPI will come out later this week, after Wednesday’s release of the Consumer Price Index.

To read Polina Vlasenko’s entire brief, click here.

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