Weaving a new 'basket'

THE consumer price index (CPI) is an indispensable tool for an economist. Managing inflation is one of the most critical objectives for the modern central banker, and the way that inflation is measured is through the CPI, that gauge of what people can actually buy with the money that they make.

At its core, the CPI measures the cost of living. It does that by first creating a basket of goods. Through carefully crafted survey methods, the goods that go into that basket and how much of each good to include are supposed to show what a typical household consumes. More carefully crafted surveys gather the price of each item in the basket. The combination of those three variables - type, amount and price - yields the CPI.

The index is not new - in the United States the CPI was first compiled during World War I - and its key methodologies are well-established and part of convention. So coming up with a better inflation benchmark than the CPI is akin to trying to reinvent the ruler. There is already a pretty good solution out there that works, and everybody is using it. Why try to change it?