Sorry, Inflation Isn't "Really" 8 Percent

A blog about business and economics.
March 1 2012 2:13 PM

Sorry, Inflation Isn't "Really" 8 Percent

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A man fills up at a gas station, on February 28, 2012 in Lille, northern France.

Photo by PHILIPPE HUGUEN/AFP/Getty Images

Kathy Kristof at CBS has a story headlines "Inflation: Not as low as you think" that should probably be given the reverse headline, inflation is much lower than you think. The basis of her story is the American Institute for Economic Research's "everyday price index" which is showing 8 percent inflation, in start contrast to the CPI's 3.1 percent increase. As Josh Barro explains, you get the discrepancy by "excluding about 60 percent of the typical household’s expenditures, most notably spending on housing and automobiles."

This is why I say inflation is almost certainly lower than you think.

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People buy different kinds of things on different schedules. The typical American buys gasoline and groceries much more frequently than he buys cars or washing machines. But the rare purchases are more expensive, and turn out to be a very large share of overall household expenditure. Our perceptions, however, are dominated by the things we buy frequently. That often leads us to overestimate the overall quantity of inflation based on rapid increases in the price of gas or milk or eggs or something else we buy all the time. The irony is that the durable goods purchases are probably the better guide to whether you're really looking at monetary inflation. Oil and food can get more expensive for all kinds of reasons—bad weather, civil war in Libya, demand from China, whatever. By contrast, the world is not facing any severe supply-constraints regarding toasters. If people want more toasters, we can build more toasters. It's no problem. So if the price of toasters is rising in the country you live in, that's almost certainly a reflection of your currency's purchasing power declining. But most people go so long between purchases of toasters (I've had mine four years and it's going strong) that they have no idea what the toaster price trend is.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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