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.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

3 Comments

On June 3rd, 2006 Mario said:

Here is a theory that I have on this issue … as long as the market is following the same inflation index to compare inflation indexed vs. non-inflation indexed investments, it doesn’t matter what the index is. I think the CPI does a good job of being that accepted standard.

For instance, bond investors will demand a certain inflation premium for their bond investments, which should reflect some sort of future inflation expectation. If you compare the actual returns from TIPS with other bond issues, you’ll find they are actually pretty close, since they both orient themselves on CPI (TIPS should be a little lower, since non-indexed bonds also demand a premium for taking the inflation risk itself).

So, regardless if actual inflation is 3% or 10%, you can only measure the inflation indexed issue to other investment opportunities available, and usually they won’t be doing much better than the TIPS or I bond. For instance, if you compare I bonds to 5 year CDs available in the last couple of years, they were always pretty close.

On February 5th, 2008 Paul said:

Was said:
Here is a theory that I have on this issue … as long as the market is following the same inflation index to compare inflation indexed vs. non-inflation indexed investments, it doesn’t matter what the index is. I think the CPI does a good job of being that accepted standard.

TRUE! The key word however is “If”. The problem is (and you can read on it), the CPI is not at all the “same index”. It is not your father’s CPI. Since Clinton the the CPI has been terribly mutated and is not at all a reflection of true inflation. I do believe that BLS only refers to it now a “measure of consumer preference”.

Having said that…an “official” rate (and I-bond payment) of inflation of 4% would stink if real inflation was something like 10% (sadly, the yardstick actually 45 inches long). But it is still 4% better than being under your mattress!

Trust, but verify.

On February 7th, 2008 Tom Adams said:

There’s a website called Shadow Government Statistics that has an interesting analysis of this issue of the CPI-U underestimating inflation.

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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