CPI a Bit Skewed

Physician's Money Digest, July31 2004, Volume 11, Issue 14

Investors' bottom line:

Inflation isn't a problem, according to some economists, as long as you don't eat or drive a car. Even excluding the volatile food and energy sector, the core consumer price index (CPI) is not tracking price increases accurately, some critics say. One example is how the CPI calculates product costs. Improvements over previous models of an item are backed out of any cost increase, so a car with more standard features may not show up on the CPI radar screen, even though it costs more. Housing costs are another problem, because the CPI tracks rental costs rather than home prices. Since rental costs are relatively stable, the CPI stays low, in spite of double-digit increases in real estate costs. Low CPI numbers keep interest rates low, which may help stocks, but it hurts those trying to live on yields from bonds and money market funds.