Here's a CNBC summary from an interview with billionaire investor Sam Zell yesterday, griping about the Consumer Price Index (CPI):

Misleading government data is fooling investors into believing there is no inflation, said Zell, who pointed out that 42 percent of the Consumer Price Index the government uses to gauge inflation is housing, where costs have been flatlining or falling. In the meantime, energy costs are up 9 percent and food is up 12 percent.

This is common grumble about the CPI: Housing holds a huge weighting in the index, and housing costs are currently falling. Thus the CPI is understating inflation as housing drowns out the screams of other goods that are surging, like oil and food.

But hold on a second. Shouldn't housing have the biggest weighting in the index? It's most people's biggest expense by far. Zell is correct that CPI gives housing a 42% weighting. And an official poll of how consumers actually spend their paychecks -- the Consumer Expenditure Survey -- shows that's probably about right:

Category

Weight CPI Uses

Amount of Paychecks Consumers Spend, According to Consumer Expenditure Survey

Housing

41.5%

34.4%

Transportation

17.3%

15.6%

Food/Beverage

14.8%

13.9%

Medical Care

6.6%

6.4%

Recreation

6.3%

5.5%

Education

6.4%

2.4%

Apparel

3.6%

3.5%

Other

3.5%

18.3%

Sources: Bureau of Labor Statistics, Consumer Expenditure Survey.

Sure, maybe the CPI is giving housing a bit too much weight, but perhaps it's also overstating food, transportation, and education. Or maybe the survey is understating them all. These things aren't perfect. The important point is that housing is most people's largest expense, so it deserves the largest weighting in the CPI. Who could imagine it otherwise?

And what about those energy costs Zell bemoans? Interestingly, most of where the CPI captures energy prices is actually in the housing segment, where utilities, heating, and electricity costs are measured. So in one sentence Zell complains that CPI's housing segment is falling. In the next, he wails that energy prices are surging -- never mind that energy is part of the housing segment.

But what about soaring food prices we hear so much about? The Consumer Expenditure Survey shows wheat products make up roughly 1% of most people's budget. Meat is about 1.7% -- fruit, 1.3%. It's not hard to see how the prices of these goods can surge without making a dent in most people's overall purchasing power. I eat a lot of oranges. The price of oranges has risen over the past year. How much will the increase cost me? An entire $3 a month. Even for a humble writer, this affects my household budget by precisely nothing. If the cost of housing shot up 20% or 30%? That'd be trouble. That'd be inflation I'd notice. The weightings of these things matter.

More importantly, just because commodity prices are rising doesn't mean the price you pay at the store is rising by the same amount. The prices of commodities you hear cited in the news -- or by people like Zell -- are typically wholesale, not retail, units. When was the last time you bought a bushel of wheat? Probably never. Instead, you buy bagels. And while the price of a bushel of wheat might be exploding, the price of bagels by and large is not. Bagel producers are either absorbing rising wheat prices out of profits or have wheat prices hedged.

It's that way for most sellers right now, including Procter & Gamble (NYSE: PG) and Ford (NYSE: F). Take a specific example, grocery giant Safeway (NYSE: SWY). After a year of surging food commodity costs, CEO Steven Burd noted in the company's last conference call that "Price per item, which had been negative all year, was flat when compared with Q4 of last year."

That bears repeating: The average consumer price of Safeway's products has been flat or declining, all in the face of surging commodity costs. This is why it's important to know the difference between wholesale and retail.

Sarah Palin got in a tiff with the Wall Street Journal over this stuff last year. First, Palin noted in a speech that grocery store prices were surging. Sudeep Reddy of the Journal responded that simply wasn't true. Along came Palin's retort: "That's odd, because just last Thursday, November 4, I read an article in Mr. Reddy's own Wall Street Journal titled 'Food Sellers Grit Teeth, Raise Prices: Packagers and Supermarkets Pressured to Pass Along Rising Costs, Even as Consumers Pinch Pennies.'"

Reddy shot back (emphasis mine):

The Nov. 4 Wall Street Journal article noted, in its first sentence, "the tamest year of food pricing in nearly two decades." It does indeed report that supermarkets and restaurants are facing cost pressures that could push their retail prices higher -- but it hasn't happened yet on a large scale.

It's difficult to pass price increases along to consumers while the economy is weak. That's a major reason the CPI shows tame inflation even while most commodity prices surge. No doubt this will end some day -- maybe soon -- and widespread consumer inflation will emerge. When it does, you'll see it in the CPI. In some areas, particularly gasoline, inflation is already brewing -- and that segment of the CPI already reflects it.

It boils down to this: As messy and imperfect the CPI is, it's not nearly as bad as some make it out to be. It's flawed. It's faulty. But it isn't lying to you. It's good at what it's supposed to provide: a very rough measure of consumer prices. Nothing more, nothing less.

Fool contributor Morgan Housel owns shares of Procter & Gamble. Ford Motor is a Motley Fool Stock Advisor pick. Procter & Gamble is a Motley Fool Income Investor pick. The Fool owns shares of Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.