Shopping for your Memorial Day barbecue, you will pay close to 29% more than a year ago. According to the New York Post, not only is a gallon of gas up 44% in the NY area, but also, lettuce will cost you 28% more and tomatoes, 86%. In addition, the New York Post shopping list included hamburger meat, hot dogs, potato salad, supermarket ice cream and coffee.
Last March, NY Federal Reserve Bank president William Dudley tried, with little success, to convince people to focus on an increasingly healthy economy in which prices were not rising. “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful.” In response, one person in the audience said, “When was the last time, sir, that you went grocery shopping?”
The Economic Lesson
How can we have such a discrepancy between respected stats and everyday reality? The key is the philosophy behind the yardstick we use to measure price increases, the Consumer Price Index (CPI). All agree that the CPI reflects the price of a market basket of goods and services. However, what should be in the basket?
As the source of the “all items” 3.2% inflation rate, the entire CPI market basket includes many goods and services beyond food and energy. Meanwhile, the 1.3% inflation rate is called the “core rate” because it excludes food and energy prices.
You might wonder why many economists respect the core rate. 1) They say that price fluctuations for food and energy are volatile; 2) Food prices are too dependent on such temporary circumstances as weather; 3) Compared to other goods and services, food prices play a lesser role in the economy; 3) Changes in food prices cannot be moderated by monetary policy.
An Economic Question: Explain why you believe the “overall rate” or the “core rate” is more valid for deciding whether inflation is a problem?