While Honolulu’s CPI sits
still, that doesn’t mean much

The Consumer Price Index
often has little bearing on how
people shop or what they pay

By Russ Lynch

Honolulu's cost of living has hardly changed since the 1980s and the latest Consumer Price Index numbers, released by the federal government Friday, provide more evidence of stability.

But economists agree that the CPI is flawed, and a lot of families looking at the numbers will feel they don't show what's happening to them. However, the CPI, up 1 percent for Honolulu urban consumers in the second half of 2002 compared with the second half of 2001, is still the best way of measuring inflation, local economists say.

The Hawaii cost of living had increased as much as 11 percent or more through 1980 but in the past five years has been running at an annual increase well under 2 percent, even declining half a point in 1998.

The CPI is the best cost-of-living indicator because it is almost the only one and certainly the widest-used, economists say.

However, it depends on prices of a fixed "market basket" of goods and services used by ordinary families. But when prices change, purchasing habits change. For that reason, it tends to make inflation look worse than it is.

And one fact about the CPI that is not widely understood, economists say, is that it cannot be used to compare inflation in one part of the country with another. The regional and city price checks are done for a different collection of goods and services in each place to reflect the real buying habits of local residents.

"If it does overestimate inflation, that means all kinds of things are thrown out of whack, like the federal budget, Social Security payments, some union contracts and a lot of legal documents that are pegged to the CPI," said Leroy Laney, an economics professor at Hawaii Pacific University. "It's a fixed-weight index and there will be substitution. As the price of chicken goes up against fish, people are going to eat more fish and less chicken. Another problem with the CPI, especially in times of rapid technological change, is that there are things that come along that people get that are not on the index at all."

It took years after cell phones came out to get them to figure in the index, he said.

"A third problem is that the CPI index weights have difficulty capturing quality changes," Laney said. "Hershey bars may be bigger than they were 30 years ago but they have the same weight" in the CPI calculation, he said.

Once it is recognized that the index has its flaws, it provides a guideline where local prices are headed. For now, in Honolulu, that's pretty much flat, Laney said.

The substitution factor was illustrated another way by Carl Bonham, a University of Hawaii economist. "Because gasoline prices are rising, you substitute away from driving your car and you decide to ride the bus. The Bureau of Labor Statistics (the government agency that prepares the CPI) doesn't allow for that in their calculations," Bonham said.

Even if it did, there would be a quality-of-life issue. "If you shift from driving the car to riding the bus, your utility of enjoyment is going down," Bonham said.

A big question about the CPI is whether consumers can use it to figure out if they are better off or worse off than a year or two earlier.

Really, all you can do is to look at prices and then look at your own income, Bonham said. "Maybe gasoline prices went up and maybe your clothing went up and it got a little harder to make ends meet. Take another consumer whose rent hasn't gone up and they ride the bus and what they buy didn't change."

"It's an indicator of the average price of consumer goods and that's all it is," he said.

Still, with all its flaws, the CPI is "the most comprehensive and most available instrument that we have for measuring changes in the cost of living," said Jack Suyderhoud, another University of Hawaii economist. "It is frequently used in contracts for adjusting prices over time."

It is still used to adjust Social Security payments and figures in calculating pay for the military, he said.

But the CPI tends to overstate inflation, said Paul Brewbaker, chief economist at Bank of Hawaii.

"First of all, it is a fixed basket of consumables, thought to be representative of 80 percent of the population," Brewbaker said. "Because of that the fixed basket it is sensitive to and tends to overstate inflation slightly."

His point was that consumers will avoid the items in that "basket" that rose in price and will substitute cheaper but similar items.

"Look at telecommunications alternatives," he said. "The new products that have been added have added technology. Prices are falling," he said, so items used in the CPI even as recently as a year ago may be nothing like goods and services consumers are now using.

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