On the eve of a major inflation test for the US stock market, Wall Street is facing the most severe "data deception" in history

Author: Wall Street Journal

Official inflation data shows the situation is controllable, but 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. June CPI data will be released tomorrow. Prior to this, the May Consumer Price Index rose 4.2% year-on-year, 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 record low in May since records began in 1978, with the June reading being the second lowest ever—over the fifty years covered by this index, there have been oil crises, 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 within the economics community.

Labor economist and independent policy advisor Kathryn Anne Edwards pointed out in a Bloomberg column that the significant gap between official inflation indicators and the public's real feelings stems from systematic flaws in the current measurement system—it uses an averaged "market basket" that obscures the vastly different inflation realities faced by different household groups. For investors who rely on this 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 pressures on the economy.

One number obscures millions of inflation experiences

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

Currently, the BLS maintains only three sets of consumption baskets: all consumers, all urban consumers, and urban wage and salaried 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 proven that this difference 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 of the highest income quintile, with a cumulative gap of 7.7 percentage points.

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

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

The data foundation is in place, what is lacking is policy will

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

The BLS has already completed the heaviest lifting—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 way of re-weighting and presenting the same set of raw data.

The 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.

The frequency of these series is lower than the monthly CPI but proves the feasibility of the technical path. Edwards suggests that the existing three baskets should be expanded at least tenfold and provide monthly data for each typical household type while increasing the sample size of the consumer expenditure survey compiled by BLS researchers.

Beyond data distortion, the real economic pressures cannot be ignored

Edwards clearly states that improvements in the measurement system cannot solve the problems of the economy itself.

She lists the multiple pressures currently facing the U.S. economy: slowing hiring, stagnant wage growth, prices remaining high for an extended period, 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 collectively explain why there is such a deep rift between consumer confidence and official data. In Edwards's view, the correct path to bridging this contradiction is not to ask the public to trust the existing data more, but to make the data system 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 differentiation in the current economic cycle—this differentiation is a key variable in understanding the Federal Reserve's policy path and risks on the consumption side.