Gene Ludwig, the former Comptroller of the Currency under President Bill Clinton, has long voiced grave concerns over the understatement of the Consumer Price Index (CPI). He argues that it doesn’t accurately reflect a reality where middle and low-income Americans are feeling financial burdens. He critiques the existing measures and introduces the True Living Cost (TLC) as an improvement. He thinks the TLC gives a better picture of what inflation means on a day-to-day basis.
Ludwig argues that the CPI, which includes around 80,000 goods and services, does not adequately capture the experiences of working families. Additionally, he argues that the many goods and services counted in the CPI are just completely out of scope for these families. For example, luxury goods like sports tickets, air travel, second homes, and golf carts inflate the overall index without representing the financial pressures felt by those with lower incomes.
“The problem with this dependence on a single indicator is that not all Americans experience inflation the same way. The CPI includes many items beyond the reach of working families, such as sports tickets, air travel, second homes and golf carts. If the costs of basic necessities such as rent and medical care rise faster than those of nonessential goods, the index may not truly reflect the reality many households face.” – Bloomberg article
Since 2001, Ludwig and his team have documented that the TLC has increased 1.3 times faster than the CPI. This discrepancy highlights a critical issue: while the government reports current CPI-based price inflation at 2.9 percent and core inflation at 3.1 percent, these figures may not resonate with the realities experienced by lower-income households.
As we’ve argued in the past, Ludwig’s right to point out that many Americans get confused by the CPI. He claims that it is “not terribly relevant to the lived experience of middle and low-income Americans.” He thinks the way we currently calculate the CPI formula is undercounting the actual price increase that consumers face. This dual perspective directly informs the way he interprets macroeconomic conditions.
The CPI, during its existence, has been repeatedly altered. Most importantly, in the 1990s, we let the air out of the inflation measure. As a result, critics assert that these changes have made it easier to understate the impact of higher prices. Ludwig claims that a formula more akin to the one used back in the 1970s would cut inflation numbers in half, if not worse. He estimates that this would effectively almost double the official figures the government has been reporting.
The implications of Ludwig’s findings are far-reaching. It’s time for policymakers and economists to reconsider how they measure and report inflation. This reexamination is even more important given THUD’s tremendous influence over the direction of monetary policy and economic development planning. Using a more inclusive measure, like the TLC, can offer deeper insights. With this knowledge, we can begin to tackle the negative financial impacts that affect so many Americans.