Nevertheless, the technique of calculating the CPI means inflation of the average person's day to day living expenses is understated.
The CPI (at least in the US) is calculated by two factors - price changes of a basket of goods plus quality improvements.
The problems I see with it is as follows:
1. The percentage of basket allocated to tertiary education is only 4%. Yet anyone who is in the market to shop for a college degree is going to allocate a lot more than 4% of their spending towards their studies. And as you know, the price of college education is now in tens of thousands, having been through double digit inflation over the past two decades.
2. Every quality improvement, including increase in speed of your iPad, how much thinner current laptops compared to previous year, cheaper LCD TVs, 4K TV vs HD TV, improved packaging on your packet of chips, will deflate the inflation index. That means for every technological improvement, the central bank will increase inflation such that the benefit you receive from the improvement will be inflated away, and you get increase in prices of everything else, at a rate that is higher than the reported inflation rate.
3. CPI only looks at prices of goods, but not prices of investments - it doesn't take into account people's need to save for retirement. It is by taking such a skewed view of prices, and through central bank intervention in currency and credit markets, we have massive inflation in the stock, housing and bond markets. The prices of those things are not stable at all.
The manipulation isn't in falsely reporting stats but in choosing their own method of adjusting the basket of goods and refraining from adjusting proportions of each good in the basket according to actual spending patterns of today's consumer.
Do not be elated when a new iPad or iPhone is unveiled - it means a quality improvement is achieved and the central bank will boost inflation to compensate, reducing your ability to buy stuff you really need - food, housing, and the ability to invest for your retirement.
