The White House has predicted that inflation is about to come down from its 39-year high, and it might be right, but not because of anything President Joe Biden has done. Rather, it will be nothing more than a mathematical coincidence — and Americans should not expect any relief.
The U.S. Department of Labor’s consumer price index (CPI) serves as one of the primary measures of inflation. The department’s Bureau of Labor Statistics updates the CPI every two years to reflect consumers’ changing preferences over time, a process called reweighting.
Items in the CPI need weights assigned to them to better reflect how much a typical household spends on one thing relative to another. Doing so provides a better estimate of inflation, but it requires reevaluating those weights periodically, and sometimes events — like a pandemic — can make that process difficult or even skew the results.
The CPI will be reweighted in January 2022 using data from 2019 through 2020, and that could provide the Biden administration with a windfall of political capital in the new year.
With the economic shutdowns, people spent an abnormally small portion of their 2020 budget on gasoline (up 60.1% in the last year), new vehicles (11.1%) and used vehicles (31.4%). Even if these categories don’t change in price from December 2021 to January 2022, their contribution to the CPI will decrease in the reweighting process.
By putting less weight on fast-growing categories within the index, this will give the impression that prices are decreasing, or at least not rising as fast.
Meanwhile, the prices of medical care commodities (up 0.2% in the last year) and medical care services (2.1%) have been increasing less than the headline inflation number. But these categories occupied an abnormally large portion of people’s budgets from 2019 through 2020, so their contribution to the index will increase in January 2022.
By putting more weight on slow-growing categories within the index, this will, once again, appear as a decrease in inflation, even if the items within those categories don’t decrease in price from this month to next.
In short, the CPI may appear to be growing more slowly next year, but that does not mean there is less inflation. Americans may hear one number in the news but see something much worse when they buy their groceries and gasoline.
The Biden administration, but not America, seems to be in the right place at the right time and could benefit politically from the reweighting, even without any political chicanery going on behind the scenes at the Labor Department. Skewed data might finally align with this administration’s rhetoric on inflation.
The White House has gone from denying inflation to calling it transitory, to blaming business, to claiming inflation is good; it’s been wrong every time.
The inflation currently afflicting the nation is the direct result of the Federal Reserve (Fed) buying too much debt in the form of Treasury bonds and mortgage-backed securities.
It did not take a crystal ball to see these multi-decade high inflation rates following in the wake of record-setting money creation at the Fed. Nor does it take a clairvoyant to see that reweighting the CPI using anomalous data will produce biased results, likely in the president’s favor.
The headline numbers may come down, but the financial hardship inflation has placed — and will continue to place — on Americans remains the same.
E.J. Antoni is an economist at Texas Public Policy Foundation and a visiting fellow at the Committee to Unleash Prosperity.