Inflation has proven itself to be more complex than we might have anticipated. The Fed has been forced to double down on its efforts to stop it. Inflation is a natural occurrence in any established economy, so why does it feel different this time? Obviously, the pandemic took an unexpected toll on the economy, but could there be another reason?
The problem could be the way we currently look at and calculate inflation. The New York Times’ Stuart A. Thompson and Jeanna Smialek look at the way we tackle the problem and ask if we’re seeing the true rate of inflation.
Measuring Inflation
One of the main metrics used to measure inflation is the Consumer Price Index (CPI). The CPI is the average change in price we pay for the goods and services available in our economy during a set period of time. We can use the CPI to calculate the economy’s basic gross domestic product, rate of return, and inflation rate. There is some argument on whether the CPI is the right metric to measure the true rate of inflation, as it excludes specific components of our economy: housing prices and luxury goods.
Economists, politicians, and reporters worry that excluding housing prices and luxury goods undervalue inflation. The CPI excludes housing prices because a house is seen as an asset with a return on investment. Rather, it uses rental pricing to gauge the true rate of inflation, using “owner’s equivalent rent” to measure the consumption for people who own property. Some believe that this undervalues inflation in the housing market and leaves home buyers at a disadvantage. Including housing prices increases current inflation by almost four points.
The CPI also excludes luxury goods, or rather, it prioritizes cheaper goods over more expensive ones. The reason being that people on a budget will also prioritize and consume cheaper goods or substitutional goods. Some argue that comparing substitutional goods create an imbalance and run the risk of overestimating inflation.
The True Rate of Inflation
The CPI is highly accurate, but not perfect. The truth is that inflation effects different groups differently. Fixed income seniors and retirees, for example, get hit harder. Whether the true rate of inflation in more or less than predicted, seniors need to be able to protect their finances. The way to do that is to stay vigilant and be able to adapt financially quickly if necessary.
The Council for Retirement Security is working hard to protect Social Security. Inflation can have a major effect on benefits, and if seniors aren’t careful, those benefits might not be enough. Join the Council in protecting the Trust and protect yourself from inflation regardless of the rate.
