How inflation works: why your money buys less every year
How inflation is measured: the shopping basket behind the inflation rate
The news says prices rose 3% this year, and your bills say something else. How is the inflation rate measured, and why does yours not match it?
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1
Someone does count them. Every month, people from the national statistics office write down prices: in shops, online, and for rents. In the United States, they record about 100,000 prices a month.
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They put all those prices together in one basket: the things households buy. Each thing gets a big or a small place, by how much households spend on it. Rent takes a big part of the basket. Ice cream is a tiny corner.
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3
Then they compare. Say the whole basket cost $100 a year ago and costs $103 today. Prices rose 3%. That number is the inflation rate, and this way of counting is called the consumer price index, or CPI.
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Rono's cheaper phone is in the basket too, and it pulls the total down a little. But the rent pulls it up a lot more. The CPI adds up all those pushes and pulls.
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But your own basket is not the average one. You spend most of your money on rent, and this year your rent went up fast. So your prices rose faster than the number on the news.
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6
Most years, the CPI changes only a little. But this summer, a big new factory opens in Miva's town. Soon prices will jump, and the first jump comes at her ice cream shop.
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Quick check
Bread and the CPI.
Show the answer
No. Bread is only a small part of the basket, so the CPI rises only a little.
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Go further
Three names that come with the CPI.