How the fork is inflation measured?
How the fork is inflation measured?
And: when will a loaf of bread cost more than your midcentury modern townhouse?
Inflation. What is it, what does it mean, who decides it, and should you give a shit about it? These are questions.
Woah, woah, woah. Hold up. Is the idiot who writes This is bullshit and so can you really going to talk about inflation? You bet your $12 macchiato I am.
I know this is probably surprising, but I’m actually a former economic research analyst. I used to be a visiting researcher at the U.S. Bureau of Labor Statistics. I swear. I’m not messing with you. I’m no Ed Prescott, but I did dabble in economics at one point.
Inflation. WILL IT EVER END? WILL GAS PRICES EVER GO DOWN? WHERE IS MAH NEW TRUCK? CHIPPPPP SHORTAGEZZZZZ.
Right now, there are a lot of opinions and angsty commentary surrounding inflation. Since I think there’s enough hysteria, op-eds, and shouting from the peanut gallery, I’ve decided to go in a bit of a different direction with this piece and instead try to explain how inflation is calculated—with a cacophony of shitty jokes.
So. Economics is unbelievably complex—there’s monetary and fiscal policy, information asymmetry, business cycles, Former U.S. Secretary of Labor Robert Reich dancing on TikTok—yet, somehow, these intricate economic principles get filtered down by the media into a mindless mix of ECONOMY GOOD, ECONOMY BAD grunting.
☝️ Every major news networks’ prime time commentary about the current state of the U.S. economy.
When I was fresh out of college and working at the U.S. Bureau of Labor Statistics, I used to sit in an empty, windowless room with no internet and no cell service. With nothing except Cracker Jacks and Keebler Vanilla Sugar Wafers to keep me warm, I was careening towards existential despair and early-career hopelessness.
Yet amongst the anguish, I was surrounded by millions of rows of U.S. government microdata. These datasets were used to calculate things like the consumer price index and subsequently, the inflation rate. (For those too afraid to ask: no, microdata is not just normal data, but like really, really small.) Microdata is information gathered at the individual level. For example—Gill Kempton, who lives at 123 North Street, filled out a government survey indicating that he spent $2,500 a month on rent and $2,000 on a new Maytag dishwasher. That government survey is called the Consumer Expenditure Survey and typically asks about peoples’ income, purchases, expenses, and demographic characteristics.
I believe the Consumer Expenditure Survey is based on some combination of questions, like: “how much do you spend on rent, bro?” mixed in with a diary element—where virtuous, sad fucks record all their purchases over the course of a few weeks.
Now let’s take a deep breath, because this shit is about to get wild.
The Consumer Expenditure Survey that Gill Kempton filled out is used to calculate the consumer price index (CPI). The CPI approximates the prices of the average “basket of goods” bought by the average consumer.
After hearing this, you might have a few questions. Questions like:
“What is an average basket of goods?” and
“What is an average consumer?” and
“How do I unsubscribe from this newsletter?”
Alright. What is an average basket of goods? That’s a good question. A goods question, perhaps. This basket of goods is based on the spending habits of the average consumer. Remember that Consumer Expenditure Survey from before? That determines which items go in this proverbial “basket of goods.”
Now back to inflation. The inflation rate is just the percent change in the price of this “basket of goods” over time.
To better illustrate this, let me introduce a man by the name of Keith “The Fist” McCarthy from Randomtownville, USA. Keith “The Fist” McCarthy is your everyday, run-of-the-mill, well-hung, average American consumer. Keith makes $100,000 a year. Keith’s “basket of goods” indicates that he spends 30% of his income on rent, 15% on healthcare, 20% on travel, 10% on beef and 100 minus 30 minus 15 minus 20 minus 10 percent on everything else. That’s cool. But there’s a problem. Say the price of beef skyrockets 9000%. Standard inflation calculations would say, “Well, the price of beef is skyrocketing and the ‘The Fist’ spends 10% of his income on beef, so therefore the average American’s grocery bill will be hurting quite a bit.” However, if the price of beef is rising more than the price of poultry, Keith and his fellow consumers will most likely switch to chicken rather than taking out a payday loan for a meal at Texas Roadhouse. This phenomenon is known in economics as “substitution bias.” Unfortunately, one of the most widely cited inflation measures uses something called a fixed-weighted price index, which does not correct for substitution bias—and this can lead to the inflation rate being overstated.
Now let’s talk about the average consumer. When you’re trying to put together the spending habits of the average consumer, you can pretty quickly see where you’d run into problems. Prices for goods and services are not rising at the exact same rates and people generally spend money on different things. Everyone’s “basket of goods” can look very different and therefore, everyone experiences “inflation” differently. For example—let’s take gas prices. Yes, gas prices are going up. But what about the guy who regularly siphons his neighbor’s gas? Or the prick who runs everywhere and won’t fucking shut up about it? These people would hypothetically be less affected by a rise in gas prices.
If I may, lemme toss in one more wrinkle: what about the quality change in goods over time? Sure, a 12-pack of Coors Light could get you just as drunk in 1978 as it can in 2021. From one year to the next, it’s always been lagered, filtered, and packaged cold. But you can’t say that about all goods and services. The capabilities of cellphones and computers have improved dramatically over the years—so chalking up price increases to inflation alone can be misguided.
This is all to say that inflation is difficult to measure. The “official” inflation rate that tends to be reported by the media is based on the yearly percent change in the All Items Consumer Price Index for All Urban Consumers (CPI-U). But old people have different spending habits than working professionals and urban consumers spend differently than rural consumers and I haven’t bought anything except Cracker Jacks and Keebler Vanilla Sugar Wafers since 2017. So when you see that the current inflation rate is at six point something percent, just remember: it’s an approximation and it doesn’t mean you have to stop #LivingYourTruth.
But the thing that really riles me up with all this talk about inflation is that nobody seems to stop and ask: does any of this even matter? I think I have just as much shame and self-loathing now as I did before the price of electric toothbrushes jumped 10%. And even if prices level out, it won’t bring my dog back.
Anyway, I hope you enjoyed this dumbed-down explanation of inflation. Did I get something wrong? If so, please light me up in the comments. 🔥🔥🔥
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