Monday, June 16, 2008

Is Inflation Higher Than Reported?

CPI is an index that measures the average price a household pays for goods and services. By its very definition, close to half of the population will actually be paying more for their goods than the CPI suggests, since it's an average. Furthermore, if a certain category of goods, let's say gas for example, has a sharp rise in price, people who spend more than average on gas will be hurt disproportionately. This may explain why we are currently constantly hearing reports that inflation is actually higher than the CPI reports.

Since gas only makes up a small part of CPI, its wide swings in price will be devastating to those living in freezing climates in larger houses who commute two hours a day in their SUVs, but has little effect on those in milder areas who walk or bike to work.

In fact, here's a look at gasoline prices and total CPI on the same chart, showing how someone overly reliant on gas will be feeling harsh effects, but how others are barely affected:

Economic theory suggests people will change their behaviour in response to the high gas prices, and shift into lower cost alternatives (living closer to work, alternative transportation, better fuel efficiency, alternative energies etc.), but often these changes take time, which makes the present situation no less painful for the affected groups.

No comments:

Follow by Email