Inflation jumped by a higher-than-expected 3.7 percent in August compared to a year ago in the biggest monthly increase of 2023, bringing more pain to consumers, especially when it comes to the cost of energy.
The consumer price index or CPI, used by the U.S. Department of Labor to measure cost changes across a variety of goods and services, rose by a seasonally adjusted 0.6 percent for the month. Economists surveyed by Dow Jones were expecting increases of 3.6 percent and 0.6 percent.
Energy prices were responsible for much of the gain, rising 5.6 percent on the month, including a 10.6 percent spike in gasoline prices. Food prices rose 0.2 percent and shelter costs, which constitute about a third of the CPI weighting, increased 0.3 percent.
The CPI, produced monthly by the U.S. Bureau of Labor Statistics, reflects the changes in average prices paid for products and services purchased for day-to-day use by 93 percent of Americans, based on a sampling of retail prices. It also produces separate sub-indexes for food, energy, and all products except food and energy.
Over the years, the methodology used to calculate the CPI has had multiple revisions. Some critics view the methodological changes as a purposeful manipulation that allows the government to report a lower CPI.
Over the past year, the pace of U.S. inflation has dropped from 9 percent to a low of 3 percent, approaching the Federal Reserve’s 2 percent target rate.
Rent increases have slowed down on an annual basis, helping moderate overall inflation. Many economists think a cooling job market and lower pay increases could make for slower price increases. And some economists expect lower demand could help keep prices down as companies struggle to charge more without losing cautious customers. Student loan repayments starting in October could also discourage spending.
However, some factors could push inflation higher before the end of the year. For example, new data and a methodological change could push up health insurance inflation in the CPI, New York Times reported.
Gold broker and economist Peter Schiff predicted that consumer price gains will be much greater in 2024 than in 2023. “As I’ve been warning #inflation as measured by the #CPI has bottomed and is now heading higher,” Schiff tweeted.
Schiff is not alone in critiquing how inflation is measured in the U.S.
The CPI has been accused of overstating inflation because of certain biases, according to QuickMBA. Some economists estimate that biases overstate the CPI by about 1 percent per year. According to the Bureau of Labor Statistics, methodological changes and revisions have removed biases that caused the CPI to overstate the inflation rate. These biases include:
Substitution bias: When the price of a consumer product increases substantially, consumers tend to substitute lower-priced alternatives. Since the CPI is a fixed-weight price index, it would not accurately predict the impact of the price increase on the consumer’s budget.
Quality bias: Over time, technological advances increase the life and usefulness of products. The CPI does not reflect such improvements.
New product bias: New products are not introduced into the index until they become commonplace, so dramatic price decreases often associated with new technology products are not reflected in the index.
Outlet bias: The consumer shift to new outlets such as wholesale clubs and online retailers is not well-represented by the CPI.