September 2023
“If you can’t convince them, confuse them.”
— Harry S. Truman —
The “official” rate of inflation or Consumer Price Index (CPI) is an unreliable indicator of how costs change. Use it when determining condominium corporation budgets and reserve fund estimates at your peril.
The CPI is “fantasy math” that should never be relied upon. It is based on a theoretical basket of goods that is continuously changing, and is so difficult to comprehend that even economists are unable to understand its workings.
The current rate of inflation, according to the CPI is around three percent, down from nearly seven percent. If its measurement criteria had remained stable the past fifty years, this would be closer to 15 percent. This lower rate of inflation makes it cheaper for government to operate. It reduces government payments for salaries, retirement benefits, and other programs which they fund. The lower the CPI, the less government needs to spend and the less they need to raise interest rates. Lower interest rates reduce the cost for government to continue carrying its debt.
Another factor keeping the CPI below the actual rate of inflation is its failure to reflect major expenditures such as home purchases and renovations. One tactic for keeping the published rate low relies on what is described as substitution. If the price of meat goes up, chicken may be substituted. For cheese, the substitution may be a less expensive cheese in the overall basket of goods. Despite the higher cost of purchasing many electronics such as a television, the CPI relies on a complex calculation that infers the price has actually dropped. While shelter costs, rent or mortgage, account for more than 30 percent of living costs, it represents considerably less in the CPI. Major expenditures such as travel are entirely omitted from the index.
For condominium management, the CPI fails to reflect the rising cost of salaries and contracts, contractors, equipment, supplies and virtually everything else included in the typical condominium corporation budget and reserve fund study. Relying on the CPI to approximate future cost increases leads to underfunded communities.
