The "Truthiness" of Inflation Numbers

We keep hearing  through the media and government officials over and over that "inflation is well under control" and all is peachy in that regard. Yet, I would hazard to guess that unless your household income is quite substantial, you probably have felt your paycheck is not going as far as you thought it would. Now, you'd think with a simple hypothesis like "if my income increases more than the rate of inflation, I will have more disposable income" would be close enough to reality to hold true -- and perhaps it did once upon a time. However, unless you are into Economics and metrics, you wouldn't be aware that neither food prices nor energy prices are included in the Consumer Price Index (CPI), the most widely used inflation metric.

The rationale given is that both food prices and energy prices are too transient and volatile. While it could be argued that on a quarter-to-quarter basis this is true, if you look at the oil, gas prices charts (specially in long term charts) there is definite year-over-year trends that could be, perhaps, normalized and added to the CPI. Further, not having food or energy prices accounted for has tangible consequences. For instance, let's say you want to invest on a "inflation protected" mutual fund. Let's assume at the end of the year, your return (before taxes) is .1% higher than published inflation numbers. You, of course, get excited until you realize your energy costs have increased by 20% in the last two years and your food expenses 5% year over year (source). Given that other than mortgage, rent  or transportation expenses, food is the highest recurring expense, it means that your return on investment was not as good as you thought it was. If you add gasoline costs to the cost of food, you are talking about 17% of your recurring income. So whether prices on all other goods and services have remained stable, the impact of food and energy can be felt the hardest due to their weight in average income. 

(graphic source: creditloan.com)

The whole point I'm trying to illustrate is: inflation numbers are truthy, but it so happens that a lot of things in our personal economies as well as macro-economy are highly dependent on that number! Interest rates, salary increases, saving rates (i.e. how much people decide to save in the bank vs. spending it or investing it), you name it. They're all tied either directly or indirectly to that inflation number. But how much weight can you give that number when you know that number is missing two very important aspects? How can I make a decision to save or to invest my money if I know that whether I do better than inflation it's a bit of a moot point? I think inflation numbers are not in the voters' psyche for this election, but I think it should be. Don't you think having full inflation numbers would help shape fiscal policy? At a more personal level, don't your think knowing that the "effective" inflation rate is, say, 7% instead of 3.5% would influence the way you budget and plan your expenses? I think I know the answer.