Is the Consumer Price Index a fair barometer of inflation?
The Consumer Price Index (CPI) is a much maligned index, and sometimes rightfully so. But in its defense, it is unlikely that the creators of the Index ever envisioned that it would be used for so many purposes. The CPI has been pressed into duty in a variety of capacities – such as adjusting incomes, retirement benefits, and even tax brackets. Participants in the fixed income markets who have much at stake in keeping an eye on inflation, scour economic data for signs of price pressures. Such statistics include the Fixed Weight GDP Deflator, the Employment Cost Index (ECI), the Commodities Research Board (CRB) Index, the Purchasing Managers Report, The Journal of Commerce Index, the Producer Price Index (PPI), Average Hourly Earnings, and the price of gold. The point is the markets are very efficient, yet have failed to settle on one piece of data that accurately captures inflation or the expectation of future price expansion. The CPI is a valiant attempt to at least gauge the average
