The reason to ignore it would be mechanical: it's more difficult to measure something when the measurement includes a thing that is adjusted by the measurement.

For purposes of setting Fed rates, it makes sense to exclude it.

For purposes of measuring perceived inflation, it makes sense to include it.

"inflation rate" is a nebulous thing.

Interest expense and interest rates, concretely paid by people like any other expense is not any more nebulous than tracking other expenditures.

We already know the interest rate and various categories of interest expense paid by population. It is just not included. Your rationale sounds very much like "we shouldn't include it because the inflation rate would be higher".

There is nothing mechanically weird about not ignoring a real expense the economy and people bear the cost of.

This isn't touchy feely, this is concrete costs people pay. Not tracking is purely political.

> Your rationale sounds very much like "we shouldn't include it because the inflation rate would be higher".

What is the CPI actually used for?

To set various levers at the central bank level to manage inflation and keep the economy humming along.

One of those levers is... the Fed funds rate... which in turn influences most other interest rates.

So you'd be incorporating interest into the measurement used to set interest.

> What is the CPI actually used for?

Technically, they pay closer attention to PCE.

CPI is used for other things too, including contract negotiations and standard of living comparisons.

Anyway, recursive sums like that are nothing unusual; as long as the sum converges it's not a problem. Any negative feedback amplifier does the same thing.

It isn't exactly. Increasing interest can mean you have to pay liabilities unexpectedly early. But it's really the difference between your income and interest that matters. If your income is keeping up with inflation then higher inflation doesn't make you worse off; it just means you are paying off debts faster.

If in a year a burger goes from $5 to $10 and the Fed rate goes from 2% to 5%, what do you think the inflationary factor should be in your methodology?