Is inflation really running at 8%?

One economic group says that inflation is much higher than we think. But the way it comes to that conclusion raises questions.

By Kim Peterson Mar 13, 2012 7:05PM
The country's inflation rate is at about 2.9%, according to the latest update to the federal government's Consumer Price Index.

But a trip to the gas pump will leave you feeling like inflation must be higher. And one economic research group says that on an everyday basis it's actually closer to 8%. The following video has more details from that group, called the American Institute for Economic Research.

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The important thing to note here is that the research group is talking about the everyday prices people pay for food, gas, electricity, child care and personal-care items like shampoo and toothpaste. Those items make up about 39% of total household spending. The group's index doesn't include big-ticket items like car payments, mortgages and appliance and furniture purchases.

So the group is trying to get at the changes in an American family's regular expenses. But it seems like that 8% figure is largely skewed by the 21.1% increase in gas and transportation costs over the last year. Other categories didn't see nearly as explosive growth. Prescription-drug costs only rose 4.2%, food and beverage costs only rose 3.6%, child-care costs rose 2.8% and household fuel and utilities costs rose 2.7%.

The Motley Fool's Morgan Housel takes issue with the group's methodology. Why wouldn't you include housing expenses in this index? That's a real expense, Housel asks, even though it's more predictable than other expenses.

"If you spend close to half your income on food and don't have any housing payments, the EPI index might be a good benchmark for you," Housel writes. "If you're an average American, CPI is probably more indicative of your situation."

The problem with the AIER's index is that by removing some 60% of American expenditures -- including house and car payments -- what real meaning is left in the everyday-price index. And if soaring gas prices are skewing that index way out of whack, what can we take away here? That gas costs a lot?

At any rate, the 8% figure is a good talking point for the cable networks. But it doesn't seem to say a whole lot beyond that.