CPI, is it a myth?
What’s the first thought that pops into your mind when you see the newly released CPI (Consumer Price Index) numbers? Do you feel like inflation is eating away at your money, or are you relieved when the rate is below 3% (as it often is)? Or maybe, you don’t feel much at all?
Since 2010, I’ve been reading Market Commentary Reports (GBD), and one thing I’ve noticed is that the author love to use two CPI numbers when discussing inflation. One is the official CPI from the Federal Reserve, and the other, often used alongside it, is from ShadowStats by John Williams, which tracks inflation based on the old 1980s methodology. For many, this older method gives a more realistic picture of inflation trends, compared to the newer calculation that includes the hedonic adjustment factors and altered basket of goods.
CPI – Digging Deeper
Over the years, I’ve been influenced by his analysis style. As a result, the first question that comes to mind whenever I look at the CPI numbers is: What are the items in the basket of goods, and what weights are assigned to each one? Here’s what I’ve summarized in the context of Malaysia.
For some, including myself, the portions allocated to Education and Housing, Water, etc, seem scant, while Food & Beverages appears to take a larger share. I believe the table reflects a general average, but caution should be taken when making comparisons, such as between urban and rural areas, different income groups, and other factors.
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