Are True Inflation Levels Higher Than CPI Suggests?

The U.S. Labor Department reported on Wednesday a 7% increase in the consumer price index (CPI) in the month of December, the fastest inflation growth since 1982. Some investors are concerned true inflation levels are higher than the CPI suggests.

CPI Vs. PPI: To calculate the CPI, the Bureau of Labor Statistics (BLS) estimates what "urban consumers" spend out of their own pockets. It relies on the Census Bureau's Consumer Expenditure Survey and then samples roughly 23,000 stores and 50,000 landlords to determine product and rent prices.

The producer price index (PPI) measures the fluctuation in selling prices received by domestic producers. The CPI is focused on the prices consumers pay, while the PPI is focused on the costs of the industries that make the products.

Related Link: 'Risks Are Rising': Experts React To 7% CPI Inflation, Highest Since 1982

On Thursday, the U.S. Labor Department reported the PPI increased by 9.7%, the highest year-over-year inflation ever reported in data going back to 2010.

The silver lining to the extremely high PPI number is that it was slightly below the 9.8% growth economists were expecting, according to John Lynch, chief investment officer for Comerica Wealth Management.

"Investors are looking for signs of moderation in supply chain disruptions, as declining input costs would ultimately signal an easing of the consumer’s price burdens," Lynch said.

CPI Calculation Controversy: One aspect of the CPI calculation process that has some questioning its accuracy as a true inflation gauge is the way it incorporates the cost of housing. Instead of measuring the price of a property, the CPI focuses on the cost of rentals.

For Americans who own their homes, the CPI calculation includes a metric called owners’ equivalent rent (OER), which is an estimate of how much rent owners would have to pay if they were renting their own house. This estimate is based on the rental rates of houses with similar sizes, locations and quality.

Given changes in rental rates typically lag the changes in housing prices significantly and do not reflect large price increases in lumber and other building materials, there can be large discrepancies between the CPI's shelter inflation reading and the Case Shiller Index, a composite index of the home prices in 10 major U.S. metropolitan areas.

Benzinga's Take: The shelter cost aspect of the CPI reading is one of several elements of the overall CPI reading that skeptics question. Skeptics also point to a note on the BLS website suggesting the bureau was considering adjusting its CPI calculation method to account for the unprecedented pricing environment during the U.S. economic shutdowns in 2020.

The Federal Reserve has been adamant that the multi-decade high inflation readings Americans have witnessed in the past several months are temporary and that pressures will be alleviated once supply chains normalize in 2022.