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Is US Economy Too Complex For Inflation Sleuths to Track?

At the beginning of every month US government employees deploy across the country and shop for whole chickens.

While they're out, these Bureau of Labor Statistics field agents may also look for baby cribs, Nintendo sets, lawn tools, college tuition, and perhaps a new home. They work fast. They have to - collecting data for the consumer price index (CPI) is a big and important job.

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"I went out with an agent once, and they picked up several hundred prices in half an hour," says Richard Bahr, a BLS economist. "It's amazing."

But does their work produce an accurate measurement of increases in the cost of American living? Yesterday, a congressional advisory commission concluded that the CPI, one of the most closely watched economic indicators in the world, overstates inflation by 1.1 percent a year.

While this seems like a small margin of error, it could have large implications for everyone from Social Security retirees to White House budgeteers.

Furthermore, the alleged miscalculation may highlight the fact that the US economy has become so complex that it can't be precisely measured. It's likely that ideas and words are now more important commodities than steel production. In the age of the microchip, are production and prices too ineffable to pin down?

"I think that's increasingly true. I don't think that means we should give up trying to measure [them]," says Leonard Nakamura, an economist at the Federal Reserve Bank of Philadelphia.

Producing the CPI is perhaps a more prosaic effort than most Americans realize. True, part of it involves highly trained statisticians peering at computers powerful enough to dim the Department of Labor's lights. But it starts with simple mass shopping.

The BLS has a "market basket" of items it believes US shoppers typically buy. This basket, derived from purchase diaries kept by thousands of families and individuals, isn't the kind of thing that can be filled by one stop at a Wal-Mart Plaza. There are over 200 expenditure categories, ranging from cereals to household furnishings, textiles, dental fees, car repair, and natural gas prices.

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Each month, BLS representatives visit or call thousands of stores, rental units, and health care offices. They obtain price data on thousands of individual items within the overall categories.

Fresh chicken indicator

The point is to mimic actual purchase patterns. Take category 06011 - whole fresh chicken.

"If they're picking up whole chickens, they'll probably get broilers, and then fryers, in proportion to their relative sales in that particular area," notes BLS economist Bahr.

Headquarters specialists then crunch all this data to see how prices have changed in the past month. They weight each item according to its importance in the overall economic scheme of things. The result - the CPI. (In fact, many CPIs. BLS publishes price numbers for everything from all urban consumers to particular cities of the country.)

CPI numbers set Social Security increases and steer federal budget figures. Thus any change in the way they're produced could affect millions of people. The problem is that CPI methodology may not have kept up with the times. Many economists have suspected the index overstates inflation and this was echoed by yesterday's report from a panel led by Stanford economist Michael J. Boskin.

An inability to properly account for changes in the very nature of goods is one of the primary CPI criticisms that inflation experts, including the Boskin panel, make. Airline prices are a good example. The BLS tracks full-fare flights and discount flights as separate products.

Real world shopping

But that's not the way Americans actually interact with the economy. To a certain extent, many consider full-fare and discount-fare tickets interchangeable - and hunt hard for the cheapest fare.

According to the CPI, airline fares doubled between 1980 and 1990, points out Mr. Nakamura of the Philadelphia Fed. Yet many Americans, if asked, might judge that their actual air transportation costs fell on a per-mile basis during that period, as super-saver fares swept through the industry.

This flaw may trouble measurement of the gross domestic product and other indicators. "There's this question about what the computer revolution has done," says Nakamura. "It's changed the connection between prices and products."

Computers have made it possible for airlines to have dozens of different prices for seats on the same plane flying from New York to Los Angeles. They've made it possible for companies to quickly raise or lower prices on all kinds of products after they're already on the shelves. And they've made possible an explosion in the sheer number of goods and services on the American market.

Taken together, it hints that economic measurements are less precise than they used to be - and less precise than policymakers believe them to be.

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