In honor of National Financial Literacy Month (recognized in the United States in April in an effort to highlight the importance of financial literacy and teach Americans how to establish and maintain healthy financial habits), I decided to highlight a subject that touches everyones’ lives in some way. The inflation rate is the percentage by which prices of goods and services rise beyond their average levels. It is the rate by which the purchasing power of the people in a particular geography has declined in a specified period. The rate of inflation may be calculated weekly, monthly or annually. But there are numerous methods used to calculate this all-important statistic which begs the question: what counts?
It is based on more than 10,000 measurements, rolled into to these indices:
- Consumer Price Index (CPI) – A measure of price changes in consumer goods and services such as gasoline, food, clothing and automobiles. The CPI measures price change from the perspective of the purchaser. U.S. CPI data can be found at the Bureau of Labor Statistics (BLS).
- Producer Price Indexes (PPI) – A family of indexes that measure the average change over time in selling prices by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. U.S. PPI data can be found at the BLS.
However, the government calculates their official inflation rate differently, and this is referred to as the Core Inflation rate – which systematically excludes what they consider to be the most volatile components of the CPI:
- fuel oil and other household fuel commodities
- motor fuel
- meats, poultry, fish, and eggs; fruits and vegetables
- infants’ and toddlers’ apparel
- public transportation
- used cars
- other apparel commodities
Core Inflation vs. BLS Measurements
Meanwhile, the BLS (as well as agencies on the state level) considers food and fuel prices as crucial components of any inflation calculation. The BLS considers food and fuel to make up 15% and 8% respectively (in terms of importance). For an idea of how detailed the measurements can be, view one of their simplified .txt lists here.
Core Inflation vs. Non-Gov’t Economists’ Studies
Other non-government economists go further. Richard Florida, famous for his studies on the “creative class” and the future of the American workforce, estimates that the average person spends up to 75% of their total income on the the very basic necessities largely excluded by the core inflation calculation.
Graphics were made from my free download, Piece of the Pie-cons. Download them here.
“Consumer Price Index (Monthly Updates).” Bureau of Labor Statistics
“What is Core Inflation?” Federal Reserve Bank of San Francisco
“Inflation: How is it Measured?” Investopedia
“Comparing Levels of Core Inflation.” Federal Reserve Bank of Kansas City
“What is Core Inflation and Why Doesn’t it Include Food and Energy?” InflationData.com