Objective: To establish a policy framework that ensures inflation data is accurately and transparently calculated, preventing skewed or misleading information. This policy will set new guidelines and methodologies for the Bureau of Labor Statistics (BLS) and other relevant agencies to track inflation accurately, without adjustments that could understate or obscure the true cost-of-living increases impacting Americans.
Background: Inflation measurement has traditionally relied on the Consumer Price Index (CPI) and other indices to reflect changes in the cost of goods and services over time. However, the current approach often includes adjustments, substitutions, and “hedonic” quality adjustments that can misrepresent real-world price changes for average consumers. For instance, when a more expensive item replaces a cheaper one in the index, it can obscure the increase in consumer costs. This policy aims to realign inflation reporting with actual consumer experiences by revising the methodologies used and improving transparency.
Policy Components:
- Redefine Core Inflation Measures to Reflect True Consumer Costs:
- Establish a “Real Cost” Inflation Index: Develop a new inflation index that tracks actual consumer prices without hedonic adjustments or substitutions, providing a straightforward view of rising costs for common goods and services.
- Enhance the Consumer Price Index (CPI): Adjust CPI calculation methodologies to reduce reliance on substitution effects, which can mask inflation by assuming consumers replace more expensive goods with cheaper alternatives. Instead, report an index that maintains consistent items to better reflect real-world expenses.
- Measure Essentials Separately: Report and track a subset of CPI that focuses on essential goods and services such as food, housing, energy, and healthcare to provide a clearer picture of inflation in areas most impactful to households.
- Minimize Use of Hedonic Quality Adjustments:
- Limit Adjustments to Necessary Cases: Restrict hedonic adjustments (which account for quality changes) to categories where improvements genuinely alter consumer utility, such as technology and durable goods, and make these adjustments transparent in reports.
- Transparency in Adjustments: Any adjustments made based on quality improvements should be explicitly disclosed in reports, with clear explanations of why adjustments were made and how they impact inflation calculations. This will prevent hidden reductions in inflation measurements.
- Implement Transparent Reporting and Public Oversight:
- Quarterly Public Disclosures: Require the BLS to release quarterly reports detailing the exact methodology, adjustments, and assumptions used in inflation calculations. These reports should clearly state the effects of substitutions, quality adjustments, and other factors on the final inflation figure.
- Independent Review Panel: Create an independent review panel of economists, statisticians, and consumer advocates who periodically audit and assess the methodology used for calculating inflation, issuing recommendations to Congress and the public on how inflation tracking can improve.
- Public Comment Period: Before implementing significant changes to inflation measurement methodologies, provide a public comment period to gather feedback and ensure that changes reflect the economic realities faced by households.
- Develop a Separate Cost-of-Living Index:
- Introduce a “Household Cost Index”: Create a new index specifically designed to track the cost of maintaining a standard quality of life for average households. This index would track necessary goods and services without substitutions and with limited adjustments, providing an alternative view focused on practical living costs.
- Track Regional Variations: Add regional cost-of-living variations to reflect differences in housing, transportation, and other living costs across different areas, giving policymakers and citizens a clearer understanding of inflation impacts nationwide.
- Annual Reassessment of the Inflation Basket:
- Standardized Review of the Basket of Goods: Conduct an annual reassessment of the goods and services in the inflation basket, consulting consumer expenditure data to ensure it represents a realistic and representative selection of items.
- Transparency and Public Involvement in Basket Composition: Invite public input on the selection of items in the inflation basket to ensure it aligns with average household expenditures and does not exclude critical but volatile cost categories such as food, energy, and housing.
- Report “Gross Inflation” and “Adjusted Inflation” Separately:
- Separate Reporting of Adjusted and Unadjusted Data: Report both an “Adjusted CPI” (with substitutions and hedonic adjustments) and a “Gross CPI” (without such adjustments) each month. This dual reporting would provide a clearer picture of inflation by showing how adjustments impact the final figures.
- Annual “True Cost” Inflation Report: Produce an annual report calculating inflation without any adjustments, reflecting the unaltered price increases for all goods and services measured. This report would give policymakers and the public a clear view of raw inflation data.