What do the governments inflation statistics really mean?

Question

They say inflation is 4.5%, but i'm sure my average spending has gone up by a lot more than this.

Answer 1

food and fuel are components of the CPI according to my economics textbook and economic professor.  Just like to point that out.

Answer 2

An index is a nice convenient figure that gives an indication of relative prices, but that's as far as it goes.

Because the indexes are "a representative basket of goods and services", it's highly unlikely that your own purchases will match this basket. So your personal inflation will probably be larger or smaller than the official figures.

Different sectors of society experience different levels of inflation. For example, old people and pensioners currently have a much higher level of inflation than youngsters, because we oldies spend a higher proportion on heating and food than younguns do. (Their parents pay.)

Also we oldies rarely buy digital goods like cameras, mobile phones and ipods, which go into the index but which effectively reduce in price as time goes by, helping to keep the index down.

The only way to be sure is to keep an account of everything you spend your money on, and compare one year with the next.

Answer 3

Firstly I'm writing from the UK, just in case any Americans get confused (since I know money supply measures etc are different i.e M1 and M2 as opposed to M0 and M4).

    Basically governments have to find an average for prices. So they construct a 'basket of goods and services' which typical households will consume. This ranges from food, fuel, clothes and electronics. Of course these goods change over time with changing tastes, trends and technology. They then put a weight on each of these individual products depending on what they believe it takes up of a typical households consumption. Then they calculate a price index. Basically when they say that inflation was at 4.5% in July, they are saying that on average, prices are 4.5% higher in July 2008 than they were in July 2007. Of course not everyone consumes the exact amount of goods that the government estimates you do. So for example gas prices are rising quite sharply. If the government estimates the average household consumes 100 units of gas, but you use 150 units of gas, your exposure to inflation will be much higher than the average consumer. In essence what I am trying to say is that the governments figures are national averages and individuals will have different exposure levels to inflation.

    When you see in the news that inflation is at 4.4%, which is above the Bank of England's 2% target they are referring to the Consumer Price Index (CPI). However there is an alternative measure called the Retail Price Index (RPI) which is currently at 5%. The difference is that the CPI is calculated using the Laspeyres Price Index method whilst the RPI is calculated using the Paasche method (mathematicians will know what I mean). The trouble is that Laspeyres indices understate the outcome whilst, Paasche indices overstate the outcome. Oh and just to confuse you more there's a third commonly used index known as the RPIX which is the RPI minus mortgage interest repayments. Economists also look at something called core inflation. This is inflation occurring in the internal economy and not imported inflation. For example when we import oil whilst oil prices are rising, this is not core inflation. Core inflation is said to be largely out of control of policy makers as opposed to core inflation which can be controlled using money supply and wage constraint. Core inflation in the UK in July was 1.9%.

Hope this all helps.

      

Answer 4

Nothing. What governments now often like to report is core CPI, because it is low. This has food and fuel removed from the CPI calculation. The M3 money supply is a far more realistic measure of inflation.

Answer 5

Inflation is measured by taking the 'price' of a bunch of different things together and comparing them from one year to the next.  

This may lead to somewhat inaccurate inflation estimates from one year to the next if there are many items included that you do not buy often or whose prices are falling due to technology or other circumstances.  

For example, if the goods being measured are a HDTV, an apple, and milk.  

If, in one year, the HDTV costs $2000, the apple costs $0.25, and the milk costs $2, and in the next year, the HDTV costs $1000, the apple costs $.40, and milk costs $2.50, then inflation was -49%.  

This is extreme, but maybe you can see the problem.  If all you buy are apples and milk, then your inflation rate was 57%.  

So, if you mainly buy goods that are increasing in price more than 4.5%, then you are right.

This may also depend on your income.  If you are making more money, then it makes sense you are spending more.  

Answer 6

They mean nothing, this crass government only measures things that it sees fit to measure, things that dont really move. They exclude housing,fuel and most other stuff you need to buy, because if the sheeple knew the truth they would be finished. It does not affect them as they can claim for almost everything on expenses.