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The BLS CPI "dangerously" Understates Inflation


As I mentioned in the Crash Course chapter on inflation, there are three major statistical "tricks" that the BLS imposes on the Consumer Price Index. They are hedonics, which tries to account for improving quality in products over time; substitution, which is the act of switching to lower-cost items when prices surge on preferred items; and weighting.

For less-than-satisfactory reasons, the BLS only weights health care at 6.5% of the CPI, although it represents 17.6% of the total GDP. That's a big problem, because health care is the biggest and most consistent source of inflation over the years.

A big portion of the underweighting of medical care can be attributed to a single category: health insurance, which stands at just 0.49% of the total CPI reading, or less than half a percent.

According to the BLS, the average family is projected to have a total exposure to rising health insurance premiums at a rate of only 0.49% (out of 100%). Given a median family income of $49,077 (the 2009 value), this means that the BLS assumes that the average family contributes just $239 dollars per year towards their health care insurance premiums. Yes, I wrote per year, not per month. That's not a typo.

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