Understanding the Government’s Published Inflation Rate

The US government reports inflation as a percentage of price level changes. This inflation rate calculation is extremely complex, and takes into account some very misunderstood concepts about product and service utility that actually raises price, but lowers the published inflation rate. In addition to other methods that skew this number. A person might ask how that could be. Remember your wage cost of living raise is calculated based on the governments reported inflation rate. This is the main reason wages do not keep pace with inflation.

First let’s discuss utility, and features of products and services relative to the inflation rate calculation. Utility is the benefit a buyer receives from a new feature of a product. For example, if a TV or cell phone contains a new feature that you do, or do not use, the price goes up regardless. Due to the utility factor, the inflation rate of the item can decrease due to the benefit the government calculates from the utility/feature they feel the consumer derives. This means many times the inflation rate decreases for that product because of the calculated benefit. This is both complex and misunderstood.

Next is the concept of stripping out volatile energy and food prices. Consumer’s use energy and food daily. This means the inflation/deflation these categories of goods produce directly impacts a family’s personal inflation rate and non-discretionary spending. Consumers use energy and food more than any other type of product.

Next is the inclusion of items that most consumers purchase once in their life time or very seldom. A house is purchased rarely, sometimes once in a life time. Cars, appliances, roofs, air-conditioning and many other items are purchased every 5-20 years. As a result, these less frequently purchased items only affect nondiscretionary prices when the purchase is made. This is a technique that further blurs the real inflation rate.

Consequently, inflation rates result in calculations that are higher or lower than most family’s experience. This causes inaccurate wage increases because companies normally give cost of living increased based on the consumer price index which is the inflation rate calculated. Normally these indexes result in lower than the family or consumer experience which contributes to wages not keeping pace with real inflation. These calculations the government publishes are not developed by political parties and bear no relationship to the parties in office. Calculations from the government are based on governmental regulations set forth that affect these entities methodologies of calculation. These calculations and regulations are derived from economic advisors discussions with legislators, cabinet leaders and agency leaders. Remember inflation rates can be different depending on geographic location. Consumers should make decisions based on their own personal inflation rates to reduce financial risks to their family.