According to the Consumer Price Index, the average rate of inflation in 2016 was about 2.1%. The cost of living increase for social security checks in 2017 is only about 0.3%. And neither of those numbers seems to be an accurate reflection of how much more you’re paying lately for just about everything. Why doesn’t the government data seem to be able to reflect the actual cost of living in the U.S.?
Consumer Price Index
The rate of inflation is reflected by the Consumer Price Index. It’s a list that monitors the cost of a variety of basic goods and services and their price changes from month to month, and from year to year. The problem is, it’s not done using individual prices, but by averages.
Inflation is figured using what’s known as a basket of goods. The CPI program has compiled a list of basic household necessities, from common foods such as milk and eggs, to toiletries, to clothing, and more. It also includes gas prices, mortgage payments, medical care, and a variety of other common goods and services.
The average price of each of these items is calculated each month. Then, it’s compared to the price of those same items the previous month. For instance, maybe milk went up by 3% from Demeber to January.
Then, all of those percentages are averaged together, to determine the country’s inflation rate for that month or year. The problem is, many of those items have, in fact, increased by significantly more. Gas may increase by 10% over the course of the year, but if other items increase by only 1% or 2%, and a few others actually decrease in price, it brings the average down, making it difficult to represent the true changes in price that goods and services see over time.
Raw Goods vs. Consumer Prices
The CPI averages explain inflation discrepancies to some degree, but not entirely. At times, even projections for individual price increases don’t reflect the amount you’re actually paying at the register. This is because those projections usually refer to the raw materials, rather than the finished product.
Say, for instance, that the USDA projects a 3% increase in the cost of beef. That 3% refers to the price being paid for it directly off the farm. By the time it gets to the grocery store, the price is likely to have gone up even more. And if you’re ordering beef in a restaurant, the price will be higher still.
It also depends somewhat on which goods are being projected. A sudden increase in, say, the price of corn, could affect a variety of products, as it’s used in a lot of different foods. Still, it’s only one ingredient, and often a small one, so it might not affect the price by very much. A 5% increase in the cost of corn from the farm could raise the price of a can of it by even more, while a cereal sweetened with corn syrup may only go up by a few cents.
Gas, on the other hand, is much more directly affected by inflation prices. If the price of a barrel of petroleum goes up, you’re likely to see a much higher correlation in the cost of fueling your car.
Calculating inflation is a complex matter. Simplifying it for the average consumer can give you a basic idea of how the economy is doing, but it’s very rarely reflective of the prices that you personally pay on a daily basis.