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 use a set standard to accurately measure return on investment in relation to inflation, and to accurately measure the standard of living one can afford on a given income in relation to inflation.
The CPI is important because it is used by the Federal Reserve to justify its money printing policies, to set the interest rate on inflation-adjusted bonds known as TIPS, and by the federal government to calculate cost-of-living adjustments (COLA) for the entitlement programs (e.g., Social Security). The more inflation is understated, the higher the inflation-adjusted rate of GDP growth that gets reported. In addition, the CPI influences interest rates, the stock market, and a host of salary and pension negotiations each year.
In addition to separating out the cost of food and energy to create core inflation, there are several biases understating inflation that have been built into the CPI.
Through the introduction of hedonics, the substitution effect, quality adjustments, intervention analysis, and geometric weighting, which are soft metrics that are open to political manipulation and can be used to artificially lower inflation, the CPI has changed from measuring inflation in relation to a set standard of living to measuring inflation in relation to a declining standard of living.
There are far better ways to deal with entitlements! One example no freebies for anchor babies, illegal aliens, brand new immigrants. and their extended families. This drain alone has cost billions upon billions for many years.
An obscene amount is spent on these freebies. Per Fair, using the completely outdated number of 13 million illegals, they cost US tax payers a net total of $100 Billion per year; using the still conservative number of 30 million illegals, the net cost 1s $ 231 Billion per year. That $31 Billion is split into $ 66.99 Billion at the Federal level, and 195.5 at the state and local level. AND these figure do not include the costs of brand new immigrants on the dole!
How about we add no bailouts of TBTF financial institutions. Another is to fold all government employees into SS and have them to contribute to their health insurance and retirement. Then there is that alphabet soup of agencies tied to the executive branch. etc. etc. ... ...
A more realistic chart of inflation:
