Author: Wall Street Journal

Official inflation data show that the situation is under control, yet American consumer confidence has fallen to its lowest level in nearly half a century—this rift is shaking the market's fundamental trust in macro data.

The U.S. CPI data for June will be announced tomorrow. Before this, the Consumer Price Index rose 4.2% year-on-year in May, and the Personal Consumption Expenditures Price Index (PCE) rose 3.4%, official data presents a picture of "concerns, but no crisis."

However, the University of Michigan Consumer Confidence Index hit a historic low in May that has been recorded since 1978, with the reading for June being the second lowest ever—this index, covering fifty years, includes the oil crisis, two stock market bubbles, a pandemic, and six recessions, yet Americans still view the current period as the worst economic time.

This contradiction is prompting deep reflection in the economic community.

Labor economist and independent policy consultant Kathryn Anne Edwards pointed out in a Bloomberg column that the huge gap between official inflation indicators and the public's true feelings stems from systemic flaws in the current measurement system—it masks the vastly different inflation realities of different household groups with an averaged "market basket." For investors who rely on these data for asset pricing and policy forecasting, this means that the core indicators they have referenced for a long time may not accurately reflect the real economic pressures.

One number masks millions of inflation experiences

The U.S. Bureau of Labor Statistics (BLS) tracks the price changes of about 100,000 goods and services each month and generates a CPI that reflects the purchasing behavior of the "typical consumer" through weighting based on consumer expenditure surveys.

Currently, BLS maintains only three sets of consumption baskets: for all consumers, all urban consumers, and urban wage and clerical workers.

Edwards points out that the fundamental limitation of this framework is that it compresses highly heterogeneous consumer groups into a single average.

BLS's own research has already proven that these differences cannot be ignored: a study covering 2006 to 2023 shows that the annual average inflation rate for the lowest income quintile households is about 0.28 percentage points higher than that for the highest income quintile, accumulating to a gap of 7.7 percentage points.

In other words, over the past two decades, the inflation pressure experienced by the poor far exceeds that of the rich, and this gap is nearly invisible in the standard CPI.

This "averaging" process has a substantial impact on the market. When investors and policymakers judge monetary policy directions based on overall CPI, what they see is a statistically smoothed number rather than the true pressure distribution within the economy.

The data foundation is there, what is lacking is the policy will

Edwards' core argument is not to overturn the existing system, but to point out that the technical threshold for extending measurement dimensions is very low.

BLS has already completed the most labor-intensive work—collecting price change data for 100,000 goods and services each month. Based on this, constructing more segmented indices by household type (single, married without children, married with minor children, etc.), income level, renting or owning a home, age, and other dimensions is essentially just a different method of reweighting and presenting the same set of raw data.

BLS already has several precedents: CPI for the elderly, CPI for new tenants, CPI excluding product specification changes, and CPI research series divided by income quintiles.

These series are released less frequently than the monthly CPI, but prove the feasibility of the technical path. Edwards suggests that the existing three baskets should be at least expanded tenfold, providing monthly data for each typical household type while increasing the sample size for consumer expenditure surveys compiled by BLS researchers.

Beyond data distortion, the real economic pressure cannot be ignored

Edwards points out that improvements in the measurement system will not solve the problems of the economy itself.

She enumerated the multiple pressures currently facing the U.S. economy: slowing hiring, stagnant wage growth, persistent high prices, rising credit card debt, high interest rates suppressing housing market vitality, and the potential impact of artificial intelligence on the job market.

These structural pressures together explain why there is such a deep rift between consumer confidence and official data. In Edwards’ view, the correct path to bridge this contradiction is not to ask the public to trust the existing data more, but to allow the data system to more accurately reflect the living realities of different groups.

For market participants, the significance of this discussion lies in the fact that with tomorrow's CPI data release, investors may need to reassess the extent to which a single aggregate indicator can accurately capture the real inflation pressures and consumption behavior divergence in the current economic cycle—this divergence is the key variable in understanding the Federal Reserve's policy trajectory and consumption-side risks.

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