Amercian's inflation bible - the Consumer Price Index - fails to tell the average person how much the actual cost of living is rising.
The true cost of living, many experts feet, actually is rising one or two percent less rapidly than the 13.6 percent annual rate indicated by the latest Consumer Price Index yesterday.
"A lot of people have the view that the CPI is the real number . . . that it's really what happened," says John Layng, the government official responsible for producing the index.
While Layng defends the accuracy of the CPI in measuring changes in prices of specific goods, he concedes that this by itself is not an accurate measure of the change in a person's cost of living.
"It is, in fact, in error" in that context, Layng says. "It is in error every month in terms of what really happened to the cost of living."
The most significant factor that alters the CPI, according to several economists, is that it focuses each month on what it would cost a person to buy a home.
With the cost of houses soaring far more rapidly than the general inflation rate, this factor sends the CPI higher than it might go otherwise.
"The typical person does not buy a house and take out a mortgage every year," says Brookings Institution economist George Perry. "For that person, the increase [in housing costs] reflected means nothing."
Any effort to change the formula, however, run into strong opposition from powerful forces representing the 60 million Americans who have a direct stake in the rise of the CPI.
The labor movement, for instance, has tied the wage increases of 9 million union workers to the CPI through contract "escalator" clauses. The government has pledged increases in Social Security benefits, food stamp allotments and military and civil service pensions for tens of millions of people to the index.
An increase of 1 percent in the index-which rose 9 percent last year can trigger $1 billion in income payments through union contracts and government benefits, officials estimate.
The very process of tying some wages to the CPI feeds the wage-price spiral, says economist Perry. When the CPI shoot upward, some wages increase, the price of producing products may go up and the CPI may be fueling the next round of inflation.
The housing flaw is not the only problem the index has in dealing with the cost of living. The CPI, based on a 6-year-old survey of how families spend their money, does not reflect changes in people's buying habits - such as shifts to chicken when beef prices soar, or shifts from automobiles to public transportation as fuel costs rise, economists say.
These problems arise "when you try to take the real world and put it into a price index, which is an abstraction, an estimate," says Layng, assistant commission for prices at the Bureau of Labor Statistics, which puts out the CPI.
Each month, the CPI begins to take shape when data collectors in 85 cities head out to collect prices on about 400 categories of goods and services. They will price everything from caviar to cornflakes, from jeans to tuxedos, from the cost of hearing a symphony to visiting a drag strip, from having a baby to holding a funeral. This direct price collection is the CPI's greatest strength.
The CPI's shopping habits are designed to reflect the way families allocate their spending amount different areas, such as housing, food and transportation. But they are based on a nationwide survey taken between 1972 and early 1974 - much of it before consumers were hit by the Arab oil embargo and the record-shattering rise in food prices in the fall of 1973.
CPI shopping habits have remained frozen since then. Consumer shopping habits haven't.
Former White House economists advisor Alan Greenspan says that because of this "the actual cost of living will always rise less" than a fixed-weight index like the CPI. The problem, to varying degrees, affects virtually every part of the index, he said.
Take transportation. The average passenger car was using 14 1/2 gallons of gas a week in 1972-73 but is now using about 13 gallons a week, according to Greenspan. Meanwhile, the volume of airline travel has been increasing as consumers take advantage of special fares on long-distance trips they used to take by car.
But the CPI still is pricing the quantity of gas and the level of airline travel dictated by its old consumer survey.
"What the data tells you is that the cost of transportation has gone up a good deal less than implied by the consumer price index," Greenspan says.
In the food area, the Agriculture Department expects that the CPI will show beef prices increasing at an annual rate of 30 percent by the end of 1979. "But the average consumer won't be spending 30 percent more for beef because there'll be less beef on the market, and consumers will switch to other products," USDA economist Bill Boehm predicts. The CPI will correctly monitor the price increase but overstate by more than 100 percent the actual impact on consumers, according to Boehm.
Officials who produce the index recognize the problem, but CPI program manager Kenneth Dalton says the bureau is caught between two opposing forces on this issue. "We don't posing to get so out-of-date that we're not reflecting what people buy," he said. But the bureau also wants to make accurate comparisons with previous indexes and can't if it keeps changing the index makeup.
Layng believes that consumers' shifting buying patterns are the most important facet of the cost of living that the CPI fails to measure. But he says that would be impossible to measure in an index that must be produced in a 3-week time limit, 12 months a year.
The CPI strays farthest from the cost of living when it prices housing, according to several economists.
By concentrating on what it costs to buy a house and take out a mortgage, the CPI showed homeownership costs rising at an annual rate of 17 percent in the past three months.
The only problem is that fewer than 10 percent of American households actually purchase a home and experience those increases in any given year, according to Brookings Institution housing specialist Tony Downs.
Brookings economist Perry said, "You wouldn't be so concerned if the number weren't going berserk, but right now it is."
The bureau is experimenting with a new housing equation, which officials feel is a more realistic measure of what it costs consumers to use their homes. That equation would have shaved more than 1 percentage point from the 9 percent rise in inflation the CPI reported last year, officials say.
Since 1972, the BLS staff has favored using the new equation that measures mortgage and other financing costs, maintenance and real estate taxes and takes into account the benefit homeowners derive when their house goes up in price. But in 1977, the idea was scrapped.
Labor objected to measuring housing costs differently than all the other items in the index, according to Layng.
"In addition, the evidence [showed] the housing index would go up slower if we were to use this concept . . . and obviously a slower-rising index is less interesting to the labor movement than a faster-rising index," he said.
Lazare Teper, research director of the International Ladies' Garment Workers' Union and head of the bureau's labor advisory council, denied this had anything to do with labor's opposition. Labor opposed the measure, he said, because it was "volatile," based on several subjective assumptions and moved away from the concept that the CPI measures actual transactions.
But even for measuring what it costs to buy a home, the CPI figures are fraught with problems.
In the Washington metropolitan area, the most expensive house the CPI priced in the first four months of 1979 sold in April for $73,000. Meanwhile, the average price of a new home sold in the area in April was $92,400, and the average price on existing homes was $82,300, according to the Federal Home Loan Bank Board.
The CPI's sample of housing fell so far below those averages because the index includes only the prices of homes financed by the Federal Housing Administration.
The FHA's $60,000 mortgage ceiling cuts out not just the more expensive homes but all homes in many parts of the metropolitan area.
"I couldn't tell you the last time we saw [a mortgage] from Northwest or Capitol Hill," said FHA official Daniel Raley. Most FHA mortgages are on houses in suburban Virginia and Maryland, and the few that are in the city generally are in Northeast or Southeast.
Brookings Institution economist Daniel Mitchell says that the CPI actually is understating the rise in housing prices that consumers face when they buy a home. The FHA sample, he says, is "peculiar" and not representative of the whole housing market.
Another flaw in the CPI, for those who view it as a cost-of-living measure, is inherent in any statistic based on averages.
Some economists believe that precisely because it is an average, the CPI does not adequately reflect the effects of inflation on large segments of population, such as the poor or retired persons, whose buying habits differ sharply from the average.
Layng agrees that there would be differences in specialized indexes but says the size of the differences probably doesn't justify the tremendous cost of producing them. The current CPI is produced with a budget of about $10 million a year.
A final criticism of the CI is that it fails to reflect adequately the influence of improved quality on prices. A small group of economists argues that these should not be counted as true cost increases for the consumer because he's getting more for his money.
Household appliances, for instance, are priced higher than they used to be, but they do more and do it more efficiently.
Northwestern University economist Robert J. Gordon estimates that the CPI is running 1 to 2 percentage points too high by inadequately accounting for quality improvement.
But Layng says the critics are "exaggerating the problem" and that the BLS is doing the best job it can without resorting to the kind of subjective judgments the government's statistic producers shouldn't make.
Layng says some BLS officials assert that the index is not a cost of living measure but simply a measure of price changes for a fixed market basket of goods. "But that distinction leaves you somewhat high and dry," he says. "I prefer to think we are trying to produce a cost of living index and that the decisions and procedures we set up try to operate in a cost - of - living framework, even though we don't have a complete measure."
As the CPI now stands, it is "a rough guide to individual families, but what it does tell us is this is what's happening to families overall."
Economist Greenspan says "the index is the best thing going but it is not the best thing possible." CAPTION: Illustration, 1979 Market Basket, The Washington Post