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“ CPI consistently understates inflation, leading to erroneous cost of living adjustments for benefits, pensions and financial-aid programs. ”
The most recent U.S. Consumer Price Index (CPI) rose by its lowest level since March 2021, which to the casual observer, is a sign that inflation is moderating. In an era where the cost of living continues to rise, accurately measuring inflation is not just essential but critical to safeguard Americans’ financial security and well-being.
The CPI, once hailed as a reliable measure of inflation, now faces mounting criticism for the many ways in which it fails to adequately measure the costs that middle- and working-class households face. For example, CPI includes luxury items, weighting things like second homes to have more impact on the CPI than beef, chicken, milk, eggs and potatoes combined.
Additionally, CPI tracks costs of medical procedures instead of actual premiums and out-of-pocket expenses. As a result, the CPI consistently understates inflation, leading to erroneous cost of living adjustments for benefits, pensions and financial aid programs.
These programs, and more, rely on the CPI as the foundation for cost-of-living adjustments. But this systemic underestimation exacerbates the financial struggles faced by vulnerable populations, including the elderly, low-income families and disabled individuals.
For example, Social Security is supposed to pay about 37% of what the recipient was making during their career. But if someone working during the 1980s started receiving Social Security in the 2010s, we would have to adjust this value for inflation — $1 in the 1980s was equal to about $2 in the 2010s.
It’s important to adjust this correctly because this would change the payout for recipients. It would be a profound breach of good faith and fair dealing for Social Security to not adjust correctly and pay out less than it promised by hiding behind an inappropriate definitional sleight of hand.
As an alternative to CPI, the Ludwig Institute for Shared Economic Prosperity (LISEP) has introduced the True Living Cost (TLC). By meticulously tracking the costs of basic necessities throughout the past 22 years, LISEP’s TLC has exposed the inadequacy of the CPI and revealed the hidden financial challenges that many Americans face. The TLC measures only essential expenses, such as housing, food, healthcare and transportation, which for most Americans makes up the overwhelming share of their spending.
The implications of the CPI’s shortcomings extend far beyond mere statistics — they directly impact Americans’ lives. Consider the case of a master sergeant in the U.S. Army who retired in 2000 after 30 years of service. Her military pension in 2021 stands at $47,741, annually. However, if her pension had been adjusted using the TLC, it would have amounted to almost $10,000 more per year, totaling $56,522.
This striking difference is not an isolated incident but rather a longstanding pattern. When comparing the total pension pay over the last 20 years, it becomes evident she lost more than $103,000 from 2001 to 2021 due to the CPI’s underestimation. There are many ways in which middle-class Americans could use $103,000, from a down payment on a house to securing college for the next generation, to just using a bit of it to actually enjoy life and save the rest.
When delving deeper into the implications of the CPI’s underestimation, it’s impossible to ignore the underlying societal impacts. Because of its important uses in many aspects of society, widening disparity between the actual cost of living and the CPI’s assessment has likely contributed to America’s growing political and social discontent. Frustration among middle- and working-class households, feeling unheard and overburdened by increasing expenses, has created a sense of disillusionment and mistrust in the system.
The TLC metric can help to create a fairer and more equitable society. By incorporating the TLC into cost-of-living adjustments, we can more accurately account for the real-world burden faced by individuals and families, enhancing their financial security and well-being. In this way, the TLC offers a future where every American’s hard work and dedication are justly rewarded.
Eugene Ludwig is a former U.S. Comptroller of the Currency and chairman of the Ludwig Institute for Shared Economic Prosperity. Philip Cornell is senior economist at the Ludwig Institute for Shared Economic Prosperity.
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