Why isn’t the cost of borrowing money included in the consumer price index?

The April consumer price index report was released Wednesday morning and showed inflation slowing slightly last month.

It’s important to remember that whatever the monthly data release tells us about inflation, the CPI doesn’t count one of the biggest categories of price increases hitting consumers — the cost of borrowing money.

Unemployment is low. Inflation has been slowly cooling. So why are consumers feeling blue?

“How people feel depends on monthly payments that they are making. Not statistical concepts of economists,” said Lawrence Summers, a Harvard economist and former Treasury secretary.

He recently co-authored a paper arguing that consumers count the cost of borrowing money when they think about how they’re doing economically, while economists do not. Take the CPI: It tracks the price of a basket of goods and services, but not the cost of taking out loans or using credit cards to buy all of that stuff.

For example, Summers said, right now the CPI includes the price of a car in its basket.

“Since most people don’t buy their cars outright for cash, it’s useful to pay attention to the lease concept and the borrowing concept,” he said.

In other words, the cost of leasing a car or getting a loan to buy it. But although Summers said economists should pay more attention to consumers’ monthly payments, he doesn’t think borrowing costs should actually be added to the basket of prices tracked by the CPI.

“You get perversities if you make it literally a part of the CPI,” he said.

Because if the CPI includes borrowing costs, it’ll rise every time the Federal Reserve hikes interest rates. In effect, the Fed would be creating inflation, said economist Krishna Guha, vice chair of Evercore ISI.

“When you raise interest rates, you push up the cost of mortgage borrowing and it pushes mechanically up the inflation rate,” he said.

Guha said that’s true for all kinds of borrowing, even though the purpose of Fed rate hikes is to push inflation down.

Plus, including the cost of money in the CPI would give Fed Chair Jerome Powell a big communication headache, said Ann Owen. She’s a former Fed economist and now teaches economics at Hamilton College.

“It would definitely cause complications for explaining monetary policy. And that’s not trivial,” she said.

Owen said borrowing costs were part of the CPI at one point. But they were gradually removed starting in the early 1980s to avoid this kind of confusion.