Lived Inflation Index

The Bureau of Labor Statistics calculates CPI by weighting categories according to their share of total consumer expenditure. Under this methodology, a $35,000 used vehicle purchased once every five years receives roughly the same monthly influence on the index as categories consumers interact with every week — groceries, gasoline, utilities, insurance.

The Lived Inflation Index (LII) applies a frequency-adjusted weighting model that re-weights the CPI basket by how often consumers actually purchase or pay for each category. Monthly obligations like rent, insurance premiums, and utility bills receive materially higher weight. Infrequent durable goods purchases like vehicles, electronics, and furniture receive materially lower weight.

The result is an inflation measure that more closely tracks the cost pressures households experience in real time — and one that we believe better explains the persistent divergence between official CPI prints and consumer sentiment surveys.

What CPI misses entirely — debt service costs: CPI measures the price of goods and services but explicitly excludes the cost of financing them. Credit card interest payments, auto loan rates, and mortgage debt service are not in the CPI basket at all. When the Fed raises rates from 0% to 5.5%, the average credit card APR goes from ~16% to ~22%, costing the median household with revolving balances an additional $1,000+ per year — a cost that is completely invisible to CPI. The Lived Inflation Index shares this limitation with CPI (it reweights the same BLS basket), but we flag it here because debt service is one of the largest and most frequent cost pressures consumers face, and its omission helps explain why consumer sentiment can diverge sharply from official inflation readings even when CPI is "coming down."

Why this matters for macro positioning: When the Lived Inflation spread (LII minus CPI) is wide and positive, it signals that the consumer is under more stress than headline data suggests. This has implications for consumer credit, real wage calculations, Fed policy risk, and the durability of the "soft landing" narrative.