Is the Government Wrong About Inflation?

One index shows that prices have recently spiked for everyday purchases like food and clothes.

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Some economists say prices for everyday items have been growing far faster than government figures indicate

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Today the Labor Department reported that prices ticked up only slightly in October, growing by a seasonally adjusted 0.1 percent from September and an unadjusted 2.2 percent from a year ago. Helping to boost last month's consumer price index was a 0.7 percent jump in prices for clothing and a 0.3 percent increase in the shelter index—the biggest jump in that figure since March 2008. Gasoline, meanwhile, reversed its recent sharp gains, with prices falling by 0.6 percent, compared to a 7 percent increase in September. The costs for used vehicles also fell substantially, by 0.9 percent.

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All of the things that go into the CPI are important parts of the consumer experience, but they don't really reflect how people live day to day—most people don't buy refrigerators and cars every day, after all. That's why one group of economists has developed its own real-life index. And by this measure, prices have in recent months been growing far faster than government figures indicate.

The American Institute for Economic Research, a Massachusetts-based firm, produces a monthly Everyday Price Index, which finds that as of September, prices had grown by 5.2 percent over the course of 2012. That's far higher than the 1.9 percent seasonally adjusted increase according to CPI data.

The price index includes basics like food, gasoline, and utilities, but also includes other common expenditures like cable and satellite TV, movie and sporting event tickets, and postage. Meanwhile, it excludes big-ticket purchases like appliances and computers, as well as rent and mortgage payments.

Aside from the gasoline and food price fluctuations that are more commonly reported in the news, there are other longer-term trends driving this index, says one AIER economist.

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"We've seen things like cable TV prices jump and entertainment prices change," says Steven Cunningham, director of research and education at AIER.

He adds that one of the EPI's virtues is that it is not seasonally adjusted, thus making a clearer picture of the month-to-month fluctuations. The CPI's month-to-month figures, meanwhile, are generally reported on a seasonally adjusted basis. In September, for example, the consumer price index grew by an adjusted 0.6 percent, compared to the EPI's unadjusted 1 percent.

"When I go to the gas station and the price has gone up in the summer because of the high gas demand in the summer, I don't get to tell the guy at the window, 'I'll go for the lower, seasonally adjusted price,' says Cunningham.

Seasonal adjustments are a way of smoothing out the CPI by removing regular fluctuations like those summer gas spikes or increased spending on heating homes in the winter. But even unadjusted price changes as reported by the government are not nearly as volatile as the EPI.

When prices go up in general, it seems, the prices on everyday goods go up more, and the same is true of price decreases. The message may simply be that consumers are simply at the mercy of wider price shifts for many basic necessities.

And though the specter of shelling out more money for anything—be it groceries or a new SUV—may be upsetting, inflation is not necessarily a bad sign.

"A little inflation—usually that will indicate there's increasing demand," says Brad Sorensen, director of market and sector analysis at the Schwab Center for Financial Research. Indeed, price levels for "core" items—that is, excluding volatile food and energy prices—are at a mild 2 percent. "We haven't seen massive inflation," he adds.

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Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. You can follow her on Twitter or reach her at dkurtzleben@usnews.com.