Thanks for researching the background for your concerns about the CPI along with handy reference links. You said:
Originally the CPI was designed to measure the cost of a fixed basket of goods, i.e. comparing apple to apples. The rationale behind this was to be able to accurately measure return on investment...
Actually, the CPI came into being during the first World War when the BLS was needed to work with inflation for the military buildup (from the BLS website). Gov't contracts had to keep track of the wildly swinging prices of the gold standard era so wage costs could be met. There was never an attempt to have a permanent "fixed basket of goods" because measuring consumer prices meant tracking the prices of what consumers bought. Consumer buying habits have always been changing and the 1998 revision you take issue with is the sixth such major revision.
The Shadow's inconsistency with allowing five overhauls and not the last is a dishonest ploy to sell bogus newsletters.
Another nice try. Once again, your post is at best disingenuous. You do get an A for creativity.
The direct quote from Chapter 17 of the BLS Handbook of Methods which you
referenced:
The CPI was initiated during World War I, when rapid increases in prices, particularly in shipbuilding centers, made such an index essential for calculating cost-of-living adjustments in wages.”
There is no mention of the gold standard, government contracts, wildly swinging prices, or meeting wage costs.
There is however, mention of rapid increase in prices and cost-of-living adjustments in wages.
Quote continued:
“To provide appropriate [arithmetic] weighting patterns for the index, so that it would reflect the relative importance of goods and services purchased by consumers,
studies of family expenditures were conducted in 92 industrial centers
from 1917 to 1919.” …
“Periodic collection of prices was started and, in
1919, BLS began publication of separate indexes for 32 cities. Regular publication of a national index, the U.S. city average, began in 1921, and indexes were estimated back to 1913.1”
[F.Y.I. WW I lasted from 1914 to 1918]
Now back to cost of living adjustments. When one is concerned about ‘cost-of-living adjustments’, a declining standard of living is not what is implied.
The cost-of-living is defined as:
The cost of maintaining a certain standard of living. or
Price of goods and services required for maintaining an average level standard of living.
A proxy for certain standard of living is a ‘fixed basket of goods’, not one in which the consumer substitutes downward secondary to price increases. In other words, a cost-of-living index = a consumer price index = ‘set basket of goods’ = a set standard of living.
If you peruse the BLS site you will notice the transformation of the CPI from representing the cost of a set standard of living over time to the cost of a declining standard of living over time.
Per the BLS Handbook of Methods, Chapter 17:
The Consumer Price Index (CPI) is a measure of the average change over time in the prices of consumer items—goods and services that people buy for day-to-day living.
In the BLS’s
‘Addendum to Frequently Asked Questions’: “
Traditionally, the CPI was considered an upper bound on a cost-of-living index in that
the CPI did not reflect the changes in buying or consumption patterns that consumers would make to adjust to relative price changes.” Note the introduction of the concept of substitution in response to increasing prices.
If you go to the BLS’s
Glossary – cost-of-living-index the transformation is complete:
“ A consumer price index measures a price change for a constant market basket of goods and services from one period to the next within the same city (or in the Nation).”
The definition of a cost-of –living index has been changed:
“A cost-of-living index measures differences in the price of goods and services, and allows for
substitutions to other items as prices change. … The CPIs are not true cost-of-living indexes ….”
The issue of changes in consumer tastes is a
red herring. Changes in tastes were always accounted for in the BLS’s on going surveys using arithmetic weighting. The transformation of the CPI to representing a declining standard living open to blatant manipulation by the political power that be required the soft metrics of hedonics, quality adjustment, substitution, and using geometric weighting introduced during Clinton’s administration.
Remember the BLS is from the government and they are there to help you. LOL