Don Boudreaux, writing for Pittsburgh Live, pokes some pretty big holes in the Consumer Price Index:
Here's an example to make the point clearer. Back in 1972, basic pocket calculators cost $100. They were so expensive that ordinary Americans didn't buy them. So statisticians at the Bureau of Labor Statistics understandably excluded calculators from the basket of items used to determine the CPI.
As time passed, of course, the price of calculators plummeted. A calculator similar to one priced at $100 in 1972 sells today for about $7.95. (In real terms, this is a price decline of about 98 percent.) So, ordinary Americans now routinely buy calculators. But because calculators weren't suitable to be added to the basket of items used for calculating the CPI until their prices dropped and they became affordable, much of the price decline of calculators was ignored by the CPI.
Relatedly, as consumers substitute away from goods whose prices rise and into goods whose prices fall, the relative importance to consumers of these higher-priced goods declines as the importance of the lower-priced goods rises -- but the weights that the CPI gives to these goods aren't immediately adjusted.
The result is that, in the CPI, items whose prices rise are weighted too heavily while items whose prices fall are weighted too lightly -- or (as in with the calculator) not at all.
At the same time, today, ink is again being spilled by those arguing that inflation is understated, since the housing portion of the CPI measures rents, as opposed to purchase prices of homes. As many have pointed out, rents haven't kept pace with home prices over the last several years, and in some cases have actually gone down, as landords lower their price to attract people away from buying a home. Ok, but this argument ignores the fact that while the nominal price of homes has risen, low interest rates have kept homes affordable. We know they've been affordable, because home-ownership has grown dramatically.
It seems that wage and inflation statistics are more confusing than helpful, which is disturbing given how much emphasis is placed on these numbers in the economy.