There is nothing that market conspiracy theorists and Fed haters love more than pointing to the Bureau of Labor Statistics’ (BLS) calculation of the Consumer Price Index (CPI), criticizing its methodology, and then attributing any inconsistencies as being politically motivated. In reality, the CPI is far from a perfect measure of inflation, and the Fed prefers to target the Personal Consumption Expenditure Price Index as its inflation gauge. The Fed feels that the PCE, while it also has its drawbacks, is a better reflection of actual consumer activity. However, the upcoming changes to the CPI’s basket weightings, which are due to be released with the January CPI report on February 14, are likely to get many of these theorists pounding their keyboards and claiming it to be the latest stitch-up by the government. In this Economics Weekly, we highlight some of these changes as being potentially significant, but also more prosaic than some commentators are likely to be frothing about.
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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.