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Why Isn’t the Consumer Price Index Rising, But the Cost of Living is Skyrocketing?

By Jim Gillespie | November 2, 2010

If you’re a broker representing landlords, you may have heard something similar to the following being said by one or more of the landlords you’ve represented:

"Why is it that the price of both food and gas have skyrocketed over the past 8-10 years, but the Consumer Price Index shows that inflation is still very low?"

And this statement is often made by these landlords when they’re scratching their heads wondering why the CPI rental increases that are called for in their leases with their tenants, always seem to be so minimal.

And the reason these increases have been so minimal, is because in recent years the way that the Consumer Price Index is calculated has been modified, and any increases in the prices of both food and energy have been completely removed from its calculation.

Perhaps the best way to show this to you here is visually, and I’ll do this through a chart prepared by John Williams and his company ShadowStats.com. John Williams is a consulting economist whose clients have included Fortune 500 companies, and as you can see on the following chart, if the inflation rate were still calculated the same way that it was back in 1980, the rate would be substantially higher than it is today.

On the following chart the blue line represents the inflation rate as it would have been calculated utilizing the 1980 approach, and the red line represents the inflation rate as it’s being reported today:

Click here to see the Consumer Price Index chart.

In addition, if you’ve been wondering why the Unemployment Rate is still under 10%, while the economy feels like it’s in much worse condition than this rate would represent, the same overall approach applies. The way that the Unemployment Rate is being calculated has changed substantially since 1994, and long-term discouraged workers who have been unemployed for longer periods of time are now completely removed from calculating the index. And as you can see from the following chart, today’s Unemployment Rate would be substantially higher if it were still calculated the way that it was back in 1994. So in the following chart, the red line represents the Unemployment Rate as it’s being reported today, utilizing the current approach when calculating it. And the blue line represents today’s Unemployment Rate if it were still being calculated utilizing the exact same approach and methodology that was utilized back in 1994:

Click here to see the Unemployment Rate chart.

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