CPI Market Basket Determined by only 0.006% of Americans

It seems like every week we discover a new way in which our daily lives are being tracked. Every phone-call, text, e-mail, credit card transaction, even every web-page we ever visit can be intercepted and archived. That’s why it seems like a quaint throwback that the CPI market basket is computed from a self-reported survey of 0.006% of American Households.

The market basket is determined from the Consumer Expenditure (CE) Survey, conducted on the BLS’s behalf by the Census Bureau. This information is supplemented by the Telephone Point of Purchase (TPOP) Survey, an old-fashion telephone survey conducted by the Census. 

Considering the massive liabilities that are tied to the computation of the CPI, using antiquated methods of data collection seems at best reckless, at worst criminally negligent. There are several reasons that the current method is dubious.

Using statistical sampling introduces an amount of error in the quantity you are trying to measure. The logic is that sampling all 316 million US citizens would be prohibitively expensive so pick a smaller sample that is still representative of the overall population. The BLS has chosen a very small sample of 7000 households, making it imperative that their assumptions are correct. Given the monotonicity of thought amongst BLS economists, it would not be surprising if what they thought was representative was in fact biased.

A combination of academic arrogance combined with constrained budgets leads me to question how representative the market basket is of the wider population it is meant to measure. This need not be the case, as spending data is available for purchase from major credit card providers. Taking a census is expensive and inefficient. Additionally, there doesn’t seem to be any thought given to the measurement error inherent in self-reported and phone surveys.

It is unlikely that people record their true purchases; reporting instead an idealized image of what they think they should have purchased. No one is going to accurately report the amount of alcohol, cigarettes, cheese-burgers, candy, soft-drinks, green tea, kale, exercise, travel or whatever else they use to numb the reality of everyday existence. For an everyday example of this phenomenon, look at anyone’s facebook page. Human beings project their own self-image into the data they report to the world (and even themselves), and the CE survey is no different.

Using anonymous spending data filtered from credit card processors would solve several problems at once:

  • It would provide researchers access to a much larger sample of the population and make the CPI market basket much a more accurate representation of individual spending habits.
  • It would eliminate much of the measurement error associated with current survey methods. Your credit card statement is much more objective than a phone survey.

Publicly available pricing information should also be included, and would provide a more nuanced and accurate picture of how inflation is evolving in the broader economy.

Sources:
http://quickfacts.census.gov/qfd/states/00000.html
http://www.bls.gov/cpi/cpifaq.htm#Question_6
http://www.bls.gov/respondents/cpi/tpops/home.htm

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