If inflation is up 3.9 percent, why does it feel worse?
One reason: Wages aren't keeping up with price rises.
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Her fiancé, Corey Bostwick, notes that one of the key price changes in their lives now is something that's going down: real estate. "We've been thinking about getting into the housing market," he says.Skip to next paragraph
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Nationwide, home prices have been falling modestly in the past year. In Stockton, the change is dramatic. Homes that sold not long ago for $350,000 now cost around $200,000, Mr. Bostwick says.
This is a real and significant price shift, but it doesn't show up as such in the CPI. The price index tallies housing by gauging what it would cost to rent a home, so it saw neither this decade's big boom nor its big bust in real estate.
"It's a consumer's price index, not an investor's price index," explains economist Mr. Bernstein.
The basket of goods in the CPI is weighted to reflect the buying patterns of urban consumers, who make up 87 percent of America's population.
Key number for policymakers
Perhaps no economic number has such direct impact on public policy. The CPI determines annual adjustments to Social Security payments and to government programs for people in poverty. It's also the basis of tax-bracket adjustments, which affect who pays 15 percent of income and who pays 25 percent.
Critics say the index has important flaws. But in general, economists across the political spectrum say the system works pretty well.
"There can always be technical quibbles, but the CPI is doing a pretty reasonable job at the task that it's trying to accomplish," says Chad Stone, chief economist at the Center on Budget and Policy Priorities in Washington.
The CPI captures the sticker shock at the pump, for example, showing gas prices up 21 percent over the past 12 months.
One source of confusion is a parallel measure called "core" inflation, in which the government strips out two of the most volatile components – food and energy.
But this doesn't mean that the government is trying to pretend that food and energy prices don't matter to consumers.
The Federal Reserve pays attention to the core rate in setting monetary policy. The rationale, in part, is for the Fed to target its policy at truly broad-based inflationary pressures. (A spike in oil prices can hit consumers hard, yet may not have roots in lax monetary policy.)
With incomes stagnant, higher gas and food prices may actually have a deflationary influence on other sectors of the economy, some economists say.
"Pricing on these items has sapped purchasing power and demand for an array of other goods," Merrill Lynch chief economist David Rosenberg said in a recent note to clients. Prices have fallen in the past year, he says, for everything from clothing and furniture to toys and TVs.