An inflation fix
Date posted: June 13, 2012
There are many measures of inflation, and each has its pluses and minuses. Federal officials are looking at a change in the inflation calculation that could help our federal budget. N.C. State University economist Mike Walden explains.
“This is just in the discussion stage. Nothing has been … officially decided. And it will be in part decided by elected officials. But one of the issues with our most commonly used inflation measures is that it’s based on assuming that you and me and all of our other consumers continue to buy what we’ve been buying in the past and buying the same amount. And we know realistically that’s not the case.
“For example, take gas prices. When gas prices go up, what do people do? Well, they tend to cut back on driving. They cut out some trips and so forth. So they’re not buying the same numbers of gallons of gasoline, but the standard way of measuring inflation assumes that’s the case.
“So, there is an alternative measure of inflation that does try to take account changing buying habits, which tends to mean that as prices for something go up, we move away from that and we move to things where prices are not going up as much.
“And so what we tend to see with this alternative measure of inflation is it results in a lower inflation rate. That’s one reason why people who are trying to deal with federal spending and the federal debt are saying if we move to this alternative inflation measure, we would be able to at least save some money in the federal budget, because there are many federal programs, Social Security being the most obvious, where payments in the future are tied to some inflation rate.
“I know that may sound very, very technical. But it’s actually very important, something for our listeners to pay attention to down the road.”
Category: Economic Perspective