Many Americans rely upon the flawed Consumer Price Index (CPI), and that fact has unfortunately resulted in irreversible long-term repercussions.
The CPI number has been in place since the 1700s. While it once was a measure describing a basket of goods that defined the same items of goods applying the same weight during the same time period, over time that basket of goods grew to encompass over 60,000 items. Moreover, prior to 1980 it was accepted universally as an accurate measure of how the cost of living increased.
Fast forward to 1983-1984, when the government realized that the cost of living was growing more than 12% – 13% per year. It was determined that if the cost of living were lower the government would save money. In addition, government officials expressed that if they wanted more money in the budget, then they needed to reduce the cost of living number.
This measure has become a result of biases and manipulations, and no longer represents a proper measure of the out of pocket expenditures incurred by Americans today.
In the early 1990s, political Washington moved to change the nature of the CPI. The contention was that the CPI overstated inflation (it did not allow substitution of less-expensive hamburger for more-expensive steak). Both sides of the aisle and the financial media touted the benefits of a “more accurate” CPI, one that would allow the substitution of goods and services. When the government started manipulating the basket of goods measured, with biases and manipulations the use of hedonic quality modeling in adjusting the prices of goods and services, they destroyed the concept of the CPI as a measure for maintaining a constant standard of living.
Generally speaking, with the biases, hedonic changes, and our manipulation of this index, it has become universally accepted as not accurate. Furthermore, the use of 60,000 items is far too many. Due to the enormous size of the basket, a change in one item can not properly be reflected in the overall measure. Additionally, because of the size of this basket, it camouflages and weakens the rise in price of any one item. As a result of this, we feel that our methodology for the Chapwood Index is a better measure of the accurate rise of items used by average Americans.
The government’s baseline CPI measure excludes items such as taxes, energy, and food. As we have explained it is clearly manipulated and biased, therefore it is rarely accurate. In creating the Chapwood Index over a 2-year period we collected over 4,000 items from friends and associates around the country of items they spend money on in the daily course of their lives. We then narrowed the list down to the top 500 items that were used most frequently. We then track and monitor the price increase of these 500 items without any manipulation and biases. This is important to underscore.
We take the precise price for the same item quarter by quarter and calculate the increase or decrease. We tracked the prices on a quarterly basis and created a weighted index based on price. These items include basically everything that most Americans consume during the regular course of their lives. Some items in the Index: Starbucks coffee, Advil, car washes, pizza, tolls, taxes, gasoline, fast food restaurants, computer paper, toothpaste, oil changes, internet service, Gymboree lessons, mobile phone service, cable TV, dry cleaning, movie tickets, toothpaste, hairspray, gym memberships, home repairs, piano lessons, laundry detergent, light bulbs, school supplies, parking meters, pet food, underwear, and People magazine.
|Actual Price in 2008|
|Expected Price in 2011 Based on Gov't CPI|
|Actual Price in 2011|
|% Increase from 2008 to 2011|
From the table above, it is easy to see that the CPI does not truly measure the cost of living because it does not accurately reflect price increases of everyday goods. Even stamps experienced a price increase above the 4% increase in the CPI over three years. The rising cost of everyday items shown in the chart above reveal that a strong, steady increase in the cost of living remains unreported by the government. The Chapwood Index, however, is an accurate reflection of the rising costs of goods and uses 300 more products not measured by the CPI. Additionally, the Chapwood Index includes taxes, energy and food that can be examined by specific metropolitan area. Without the honest reporting of these statistics, the purchasing power of our hard-earned dollars will erode.
An unintended conclusion was observed while going through this exercise.
With wage increases in the private sector, government entitlement program increases, and financial advisors targeting the flawed CPI number as a benchmark to beat, we concluded this is the reason for our nation’s increasing dependency on entitlements.
People are falling behind due to the CPI of 60,000 items not reflecting the real cost increase of their lifestyles. This is the unintended negative result of 28 years of CPI manipulation by the government in an effort to get government entitlement increases to a minimum.
The Chapwood index is our effort to help people understand why they feel like they aren’t keeping up and why as they get older they feel as though their money does not go as far – even when they’re following the rules and working hard.