(Bloomberg) — The already-high U.S. inflation gauge would have been even higher in 2021 according to a new measure of car prices that the Bureau of Labor Statistics plans to start using later this year.
The BLS will replace its internally collected prices of new cars and trucks with data from J.D. Power, starting with the April consumer-price index that will be released in May. The new gauge will be the first component of the CPI that’s based entirely on transaction data, allowing real-time weighting based on what kind of vehicles consumers are actually choosing.
“It’s real-time, so much closer to reality,” said Omair Sharif, founder and president of Inflation Insights. “It’s a very good move by the BLS. They’re always trying to figure out a better way, and this is a big step forward.”
U.S. consumer prices climbed 7% last year, the fastest pace since June 1982, with surging auto costs — largely triggered by a shortage of semiconductors — accounting for a big chunk of the gain. The Federal Reserve is widely expected to start raising interest rates as early as March, as it seeks to rein in inflation.
BLS economist Steve Reed calculates that annual inflation for cars was 14.4% as of November based on the J.D. Power gauge, versus 11.1% in the one currently in use. That suggests the overall inflation rate would have been about 0.12 percentage point higher that month — 6.93%, instead of 6.81%.
But Reed cautions that it’s impossible to make forward projections of the new data set, so its introduction won’t necessarily mean inflation readings are higher this year.
He also says that the new car gauge likely won’t be the last time that the CPI gets tweaked to take advantage of big datasets available elsewhere — though “it’s usually a lot more complicated than just sort of buying some data and plugging it in.”
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The BLS explains in detail the methodology used for the new measure of car prices in a working paper:
A New Vehicles Transaction Price Index: Offsetting the Effects of Price Discrimination and Product Cycle Bias with a Year-Over-Year Index
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