Sigh.
More evidence that Economics 101 teachers have failed for a couple generations. And, simultaneously, more evidence that current politicians can't be trusted.
/enter rambling lecture mode
I.
Almost every comment there reflects a misunderstanding of how index numbers work. Yes, boys and girls, when the price of a good goes up, we substitute away from that good. And that's true whether it's gasoline, bread, or anything else. And so any price index that fails to adjust for changes in the "basket" we buy will overstate the amount of inflation.
How much it will overstate things depends on the elasticity of demand for the goods in the basket of commodities used to construct the index. If the good whose price has gone up has demand that is relatively "inelastic" (fancy economist talk for "the quantity we buy won't change much when the price goes up", e.g. gas for someone who has to drive to work every day). If the good has relatively "elastic" demand (i.e., the quantity we buy changes a lot; example: the gas at station X, when the commuter can easily choose station Y who hasn't changed its price.
But elasticity only refers to the AMOUNT of the substitution, not to the DIRECTION. The law of demand (when price of something goes up, people are going to buy less of it) hold for every good. Even gas. Even food. And so any index number that fails to account for this substitution is going to overstate the effect on inflation. Some. Even if prices of every good in the current basket of commodities used for the CPI goes up, there will be substitution away from those basket goods to non-basket goods.
Using something like the CPI for an estimate of inflation will ALWAYS have this problem, because indices like the CPI work by keeping the basket fixed over time (if you don't keep it fixed, you have a comparing-apples-to-oranges problem.
II.
So, in principle, the politicians are right.
Unfortunately, they're at best, stupid, and at worst disingenuous and deceitful, in their application of the principle here.
They're stupid in that they're wasting time trying to fix multi-trillion dollar annual problems with tweaks involving a couple hundred billion dollars over a decade.
They're disingenuous and deceitful, because they're manipulating numbers for transient political purposes, nothing more. The substitution effects aren't going to disappear, just because they make this sort of change. They're still going to be there. Tomorrow's CPI is going to have the same kind of problem as today's. They aren't making a permanent fix of the CPI. (With this sort of error, no permanent fix is possible.
They are simply trying to hide evidence of today's price changes. To find ways of saying "things aren't as bad as you think." To find ways of distracting us from noticing how profligate they are continuing to be. To find ways of hiding how little they have helped and how much they have hurt with their "quantitative easing," their "stimuli," their "jobs programs," and all the rest.
And its insidious. Because not only are they doing the usual politician things of covering their asses and perfuming the smell so we think they're Hollywood starlets worth taking out for still more expensive dinners. But because they're doing it in a way that makes the statistics not just imperfect (which is unavoidable, after all), but incapable of effective interpretation.
If they really cared about "accuracy," what they would do instead of trying to make perfect that which cannot be made perfect, is be honest about margins of error and the like. Instead of talking about how the CPI is tenths of a percent bigger or smaller, or how changes in tenths of a percent affirm their policy claims or refute their opponents', they would admit that the margin for error in the CPI is on the order of tenths of a percent and is always going to be. Instead of bragging about savings of tens of billions in GDP (a magnitude of change which is probably too small for us to measure), they should be confronting the waste of trillions.
Fat chance of that, of course.
III.
Finally, the commenters and the politicians, both, have missed the fact that "inflation" is something qualitatively different from an "increase in prices/change in the cost of living."
Inflation is a decline in the purchasing power of money. Every dollar purchases less of ANYTHING than it did before. It doesn't just purchase less gasoline (as it does when the price of gasoline goes up), or purchase less bread (when the price of bread goes up). And it doesn't just purchase less of the 200 or so goods in the CPI either. It purchases less of any of the tens of millions of goods traded daily in the economy. It purchases less of the goods we "live on"; and it purchases less of the goods we "use to produce stuff," and it purchases less of the goods we "save for use later."
Of course, no one, not even the smart people at the Department of Commerce, can measure the decline of purchasing power of money directly. They can only measure price changes. And of course no one can keep track of tens of millions of prices either. So we sample. We pick 200 or 2 prices, track them, and use the changes to estimate inflation. We sample.
And since we sample, we have various errors in the amounts we measure. One part of which is the substitution bias.
But the bigger error we make is the use to which we put the calculations.
If all food prices go up, its bad ... when we're looking at food as consumers. But if we're looking at food as sellers of food, it can be a good thing. (If the demand for the food the seller sells is inelastic, that is. Not all food, e.g., lobster, has inelastic demand.)
The same for gas.
So when you see this price, or that price, or the other group of 200 prices, change, your interpretation is going to change based on which point of view you're coming at things from.
All of which is fine and good. But that is NOT what inflation is about. Inflation describes something that happens across the board, regardless of whether they're looking at things as producers or consumers, as farmers of corn or eaters of corn, as employers or employees, etc., etc.,
Complain about rises in prices, or in the cost of living, all you want. But don't call it inflation.
/exit rambling lecture mode.
And do not be conformed to this world, but be transformed by the renewing of your mind, that you may prove what is that good and acceptable and perfect will of God.
Romans 12:2 (NKJV)