Is the CPI-U a true measure of inflation?
Wednesday, May 31st, 2006
Categorized as: Series I US Savings Bonds
In case you missed it, there’s a discussion of the question of whether the CPI-U is a good measure inflation in the comments following the post Hedging against inflation: gold or I bonds?.
Yesterday Scott Burns, financial columnist for the Dallas Morning News, gave a thoughtful answer to this question in his column, We all experience inflation differently.
Burns points out the CPI doesn’t ring true for the elderly because of medical expenses. Medical expenses, he says, account for as much as 20% of an elderly person’s budget but have only 6.2% of the weight in the CPI. Since medical expense inflation is a lot higher than the CPI, the CPI isn’t a true reflection of inflation to the elderly.
Likewise, Burns says, fixed-rate loans and mortgages provide debtors with inflation protection that makes their true inflation rate lower than the CPI.
Nonetheless, the CPI is the best measure of inflation we have and it’s what the Treasury uses to set the I bond rate. If it doesn’t measure the kind of inflation you’re interested in, I bonds won’t protect you from that kind of inflation.