Reading Inflation from the CPI

A popular concern for everyone who makes purchasing decisions is the extent to which the buying power is eroded by inflation. This is in spite of the fact that a clear understanding of the computation of the official inflation figures and the causes is not well understood. In all honesty, not many economists and pundits too understand the limits of the published figures on inflation. Writing in the regular column in the NYT, David Leonhardt explores some of the oddities that emerge from the composition of the CPI basket in addition to the implications that emerge from benchmarking against the official figures.

It draws on the fact that the CPI is an aggregate measure to the extent that it is comprised of goods and services that are weighted in the basket. for individual purchasers though, the real rate of inflation for their income may be different from the average because of the consumption decisions that they make. The most perceptive point in the piece though is the fact that there tends to be a lag in the inclusion of certain goods such as models of automobiles whose costs may drop commensurately with an increase in quality. Nearer the end, he alludes to the earlier finding by professional economists that the index tended to overstate inflation and the revision that occurred. the nice piece is not only a primer on inflation and the difficulty in its delicate calibration, but that economic aggregates must be read carefully.