Looking at Inflation

In today’s NYT, David Leonhardt makes some interesting points about inflation. The things that are rising in price and the ones we pay most attention to. The ones that are flat or falling, we tend to ignore.

There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise.
When you dig into the Consumer Price Index, you start to realize just how many things fall into this category. The price of major appliances has been flat over the last year. Furniture is 1 percent less expensive. A decade ago, a basic four-door Toyota Corolla LE cost $16,018, according to the company. The 2009 basic model costs $16,650, and it’s a safer, more powerful, more fuel-efficient car than its predecessor.
To top it all off, most people don’t buy any of these items very often. “People tend to remember things they do frequently,” says Stephen Cecchetti, an economist at Brandeis University who studies inflation. “And what do you buy more frequently than gas and food?”
But combine the less noticeable trends with some true price declines, like a 5 percent drop in women’s clothing over the last year, and an inflation rate of 4 percent starts to seem more reasonable. Inflation really has gotten worse recently — it was only 2 percent a year and a half ago — but it’s not as bad as it feels.

The whole idea of trying to measure inflation is a very difficult task. The reason is that if, say, chicken rises more than beef, consumers will start eating more beef and less chicken. In other words, as prices change, the weighting for each grouping changes.

Posted by on May 7th, 2008 at 9:37 am


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