What is the Real Inflationary Rate?

Question

If everything I buy this year is up on average 25.4% does that mean the real inflation rate is only 3.4% in real terms.

Oil is up nearly 1000% since 1999 does that mean the real price rise was only 3% per year?

Answer 1

What do you mean by the "real" rate of inflation? What is your goal?

The definition of the number you wish to use, and there are already many different numbers, all "real", even several computed by the U.S. Department of Labor:

http://www.bls.gov/bls/inflation.htm

depends on what you want to do with it.

If you want to know how your current standard of living compares with what it was this month last year, then looking at your costs for the things you buy regularly (both then and now) would be appropriate.  

But if you are looking at next year's budget for your organization, your expenses are not particularly important - the organization's expenses are, and month-by-month variations are less important than longer term trends.

No one is going to say that food and oil have only gone up 3% since last year. On the other hand, oil and food prices have been so volatile that no one in his right mind is going to claim the know what the price of a barrel of oil will be a year from now, even within $10.

In February, oil was below $90/barrel. Now it is over $130. Which number do you want to use for your "real" inflation rate? If some average, what kind of average: over time? over barrels of oil sold? and if the latter, to whom?