News outlets have informed us that the rise in the Consumer Price Index (CPI) slowed in January to 6.4% with core inflation at 5.6%. When that news crossed the tape, the financial markets seemed to rally, indicating the professional investing community is happy with the result.
So, why does inflation feel so much worse under President Joe Biden?
The CPI measures a large basket of consumer goods from airfares to used cars and many things in between.
But the CPI does not capture the true impact of inflation on families. To be more accurate, the Bureau of Labor Statistics (BLS) — publishers of the CPI — decided to measure "core inflation" by excluding food and energy prices, which can be more volatile. It was a nice try, but food and energy, such as gasoline, are a large part of the goods purchased by your average family. This explains why the CPI cooling and a trip to the grocery store can elicit different outcomes.
This data is not representative of the "feel" of inflation for two reasons. The first is that month to month, consumers do not buy most of the goods on the index. Airline tickets and used (or new) cars are infrequent purchases, so changes in those items do not impact consumers consistently.
Second, when consumers are feeling financial pressure, they change their purchasing habits — what economists call the "substitution effect." Consequently, the mix of goods purchased changes as well as the specific goods purchased within a category, such as going from a name brand to a store brand. In summary, the CPI is a broad measure of inflation but perhaps fails as a measure of inflationary impact.
To really measure the impact of inflation on main street, we need to create an alternative price index: the Omelet Price Index (OPI). The OPI is composed of the ingredients to make a three-egg, ham-and-cheese omelet with toast: eggs, ham, American cheese and sliced white bread. (No fancy Gruyère cheese or eight-grain bread in our diner.) The OPI also addresses the shortcomings of the CPI: It is comprised of four staple ingredients that are consistently consumed by families across the country.
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The recipe for the omelet is three eggs, two slices of ham, two slices of American cheese and two slices of white bread. The OPI was calculated based on that mix.
What does the OPI tell us? Well, according to the BLS data, the price of eggs (grade A, large, per dozen) is up 150.0% from January 2022 to January 2023. Ham (boneless, excluding canned, per pound) is up 9.7%, American processed cheese (per pound) is up 19.7%, and bread (white) is up 21.4% per pound.
So, whipping up that three-egg ham and cheese omelet with a side of toast has increased in price by 49.9% from January 2022 to January 2023.
The BLS basket of goods has risen 6.4% year-to-year, but my favorite breakfast is up almost 50%. Is it any wonder the economy "feels" worse than the official pronouncements tell us?
The BLS is not wrong, and the CPI is meant to measure inflation’s effect on a broad scale to give policy makers a comprehensive understanding of the economy. But in certain ways, it does fall short. The OPI© tries to simplify that idea and make it more applicable to the average family by focusing on staple goods that we all buy. You can do this in different ways; for example, what about a Burger and Beer Index (BBI)? Or upgrade to a Western Omelet Index (WOI) to get some vegetables in there as well.
You get the point. It feels worse because it is worse. After all, the omelet does not lie.
