Actually, flaws in the Consumer Price Index (CPI) have been apparent to a lot of people for quite a while. Some argue that the CPI overstates inflation. Others argue it understates inflation. Your perspective depends on where you sit on the political spectrum, and it has been mostly an esoteric debate among the cognoscenti.
But when Colorado announced this week it would be the first state to lower its minimum wage because the CPI has fallen, flaws in the CPI became a very real problem for a lot of people.
Colorado is one of ten states that have tried to take politics out of the wage debate by setting their minimum level to move automatically with the CPI. However, laws in the other nine states set their minimum wage only to rise if the CPI does, with no provision for lowering the wage if the CPI drops. For example, Washington and Montana have just announced that minimum wage in their states will remain flat next year. For those of you keeping score, the other seven states are Arizona, Florida, Missouri, Nevada, Ohio, Oregon and Vermont.
The news from Colorado makes the flaw obvious. The cost of living has not decreased. Not for residents of Colorado, for any of the states that use the CPI to set their minimum wage, or for anyone else. Seriously - has your cost of living decreased since last year? The only places where I'm saving money is where I've made an effort to cut back on spending. But just because I'm eating chard and eggplants from my community garden plot doesn't mean the cost of veggies has gone down at the grocery store.
If you work for more than minimum wage and are outside Colorado, this still may affect you. Many businesses use the CPI to calculate cost-of-living raises for their employees and are using this year's decline to withhold salary increases.
Here's the kicker: the Bureau of Labor Stats - they collect the data and run the numbers - states quite clearly the CPI is not a good measure of the cost of living.
Then why do states and businesses use the CPI to set wages and salaries? Because it's widely treated as a cost-of-living index. Which now seems very strange. To truly calculate the cost of living at the community, city or state level would require collecting a lot of data regularly on buying habits and visiting local stores to find out how much things really cost. A prohibitively costly endeavor.
There are a number of alternatives to calculate wages that would truly cover the cost of living, including self-sufficiency standards and the universal living wage campaign that would base the wage on housing costs.
For Coloradans, the wage drop is three cents per hour, which comes to $62.40 for a full-time worker over the course of the year. If you think that's not a lot of money, talk to someone who's trying to get by on the minimum wage. Or talk to someone who won't be getting their annual raise this year thanks to the CPI decline.
It's time to figure out a better way to more accurately calculate the cost of living for American workers.