Economists are asking the US to report inflation by income

Matching shoppers to prices.
Matching shoppers to prices.
Image: Reuters/Andrew Kelly
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The US’s most popular inflation gauge, the consumer price index, is one of the few areas of American life where income doesn’t really play a role.

The indicator, which is compiled by the Bureau of Labor Statistics (BLS), is based on the agency’s’ understanding of average consumption of goods and services. It doesn’t reflect differences between what the rich and poor buy, or how much they pay for it, giving policymakers little visibility on how prices affect people across the pay scale.

So now, a group of economists is suggesting that inflation be reported by income group. The economists, who were brought together by the National Academies of Sciences, Engineering, and Medicine, say in a new report that a more nuanced reading of prices is key to understanding inequality in America.

“The CPI has been considered the gold standard of inflation measures,” said Daniel E. Sichel, an economics professor at Wellesley College and chair of the committee that wrote the report. “But as the world changes, if there isn’t progress towards data modernization, the CPI will cease being the gold standard.”

How to build a better US CPI

The need to measure inflation by income stems from two economic truths: Poor and rich Americans do not put the same items in their grocery cart and they don’t even shop at the same grocery stores. But so far, the BLS has no way of parsing through the contents of each group’s carts.

“They can’t identify that a high income person is buying a gallon of milk in one kind of a store and has one price, and the low income person is buying a gallon of milk in a different store that has a different price,” Sichel said.

To get around that, they want the BLS to survey independent households to get a more granular picture of spending. That way, policymakers at the US Federal Reserve and in the US Congress could better address wealth inequality, welfare, and poverty.

The report also outlines how the BLS could use web-scraped data to track the price of online goods. The agency currently relies on in-store data, which is already becoming less relevant as the share of Americans who shop online increases.

What and when will US CPI change?

Sichel couldn’t say whether the additional data would result in a higher or a lower inflation rate than under the current methodology, but they would provide a more accurate picture.

The BLS, which commissioned the study by Sichel and his colleagues, has already been considering revising elements of the CPI.  Based on how other countries have pursued CPI modernization, it could take the BLS several years to complete the task. The agency’s current goal is to have a “significant portion” of its measurements drawing on non-traditional data by 2024.