What’s holding down inflation?
Date posted: December 7, 2010
People seem to be confused about inflation. The government tells us the overall rate is very low — between 1 and 2 percent — yet we are seeing significant increases in food and energy prices. How can higher food and energy prices be compatible with moderate inflation? N.C. State University extension economist Mike Walden explains.
“The issue here … is food and energy prices are things that we see constantly. Most of us buy gasoline maybe a couple of times a week, and we certainly go food shopping at least once a week. And we are seeing higher rates of inflation for those particular items.
“The reason it is not translated into overall higher inflation is because food and energy don’t account for very high percentages of our total spending.
“In the latest survey the government found that food spending accounts for only 12 percent of total consumer expenditures, and what we spend on gas accounts for 5 percent. So the two of them account for 17 percent of overall consumer spending. That means 83 percent of our expenditures are on items other than food and gasoline, and for those items we have had very, very low inflation.
“So it is a matter of how the government calculates the inflation rate. They weight the prices by their relative importance, and the bottom line simply is that food and energy costs don’t count that much in the overall calculation.”
Category: Economic Perspective