The $10,000 Light Bulb …Or, why it's so hard to measure inflation.

Remarks from the Fray:

The inflation rate differs greatly by socio-economic class, and the government makes no attempt to consider this. Coming up with a consumer price index mean selecting a "basket of goods" and tracking what happens to the cost of buying that basket over time (with various statistical tricks used to tinker with the makeup of the basket, based on the relative prices of the individual items in it). But the obvious question is WHOSE basket do you work with. The basket of the average consumer will differ from that of the median consumer, and the basket of someone at the 10th percentile will differ greatly from the basket of someone at the 90th.

I'm an upper-class guy, so, for me, inflation hasn't been too bad in recent years. The percentage of my total income eaten up by healthcare costs, gas and heating costs, food, clothing, and energy is relatively low, compared to what one might see for a much poorer person. Meanwhile, I spend a fair amount on the luxuries and vices of the rich: high tech toys, big-screen TVs, exotic cruises, and personal services (like having other people plow my driveway). The prices for those things has mostly been falling in recent years -- I can get a much better big-screen TV today for what I would have paid in 2001, and income stagnation for the working class means I can hire them a bit more cheaply than in the past. For me, the inflation rate might actually be negative... or, at least, fairly low.

But, if I were a much poorer American, inflation would have been eating me alive in recent years. Healthcare costs have been spiking dramatically. If that were a big component of my overall purchases in a year, as it is for poorer people, it would be a huge driver of my own inflation rate. Same with gas prices -- if figuring out how to pay to fill up the car were a major component of my budgeting challenge, then having gas prices jump from $1 to $3 in a decade would be a brutal challenge. Meanwhile, all those drops in the price of electronics wouldn't mean nearly as much in my personal inflation rate: if I'm still using a TV I bought in the mid-90s, because I can't afford to upgrade, it doesn't much matter to me what has happened to TV prices and quality in the intervening years. And, of course, the falling cost of personal services is no advantage to me if I'm more likely to be the provider of such services than the consumer of them.

In some situations it makes sense to come up with an "average" inflation rate. But in others, it would make a lot more sense to tailor the "basket of goods" to what is actually being bought by the poor or the rich, rather than by your typical American. For example, when the threshhholds for the poverty rate is calculated, they use an average CPI, rather than one that's relevant to the poor, which is just silly. Whether or not the "basket of goods" of a typical American is getting more expensive or less isn't terribly relevant to the question of what's happening to the "basket of goods" of an atypical American in the 10%-20% range of incomes, who might be falling into or out of poverty.

We'd be better served if the government came up with several CPI rates, not just urban/rural (as currently), but in five percentile increments by income class. Then apply the right inflation rate in the right situation. For example, if you index the estate tax exemption to inflation, use the inflation rate for the class that will actually be impacted by the estate tax, not the inflation rate for average people who aren't impacted in the least.

--Arkady

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Let's all remember that a huge part in pursuing happiness for the average human is attempting to find good sex and/or fun/"meaningful" relationships. The problem is that regardless of how "rich" we get as a whole, that fact per se does not affect the cost of finding and engaging in sex/good/fun relationships.

You will always compete with other humans for this, and, if the average human is richer, then the humans you're competing with in general will also be richer, so richness per se becomes irrelevant to what is a big part of what humans view as pursuing happiness.

--Bouje

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While economists might think we're overestimating inflation, I think that people living and working in the contemporary American economy would probably differ with them on the point. Wage growth in America has been horrible for decades now and it's been especially bad during the last five or so years. We've got record low unemployment but still not tightness in the labor market that is driving wages higher. The notion that we're richer than we think seems like a bit of trickery that doesn't jive with the real world.

--destor23

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I recall a British saying about gin; Something like, "drunk for a penny, dead drunk for tupney." With the price of a good martini around $5.00 nowadays, THAT'S inflation. [...]

I doubt that Bruegel's peasants even HAD any income, let alone $6.00/year. Most of the trade was barter, home-grown food, hunting, etc. Without a record of time spent on acquiring the necessities of life (food, shelter, clothing, energy) the comparison doesn't make any sense.

--portorchardkid

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No one cares how rich they are compared to their great great great great grandparents. I care how rich I am to how rich I was when I was 20, 30, or 40 years younger than I am now. That, I would argue, is what actually matters to humans - not economists, but real living humans.

In the last 25 years, higher education has become much more expensive. Housing has become much more expensive. Retirement has become much more expensive, etc. Although manufactured goods have become cheaper, and some have even become higher quality for less money, the big ticket items through life look like they have increased in cost at a much faster rate than the stated rate of inflation. When a single low level civil servant can support 5 people in 1970, and someone working at a similar level (buying old used cars, few clothes, cheap vacations) today cannot because of the high cost of housing and the high cost of college education and the high cost of health insurance, what happened? Did wages go down or did prices go up? Isn't that the definition of inflation?

--Answer_grape

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(5/27)

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