The news says inflation was a few percent last year. Then you push a cart through the store on Garth Road, look at the receipt, and think: that can't be right.
Both things can be true. The official number and the number you feel measure different things. Knowing how the official one is built makes the difference less mysterious, and helps you think about your own money.
How the government measures prices
The main measure is the Consumer Price Index, or CPI, from the federal Bureau of Labor Statistics. Every month, BLS staff record tens of thousands of prices across the country, about 80,000 items a month: eggs, rent, gasoline, haircuts, car insurance, doctor visits, televisions. They are not guesses. They are prices of real items in real stores and offices.
Those prices are combined using a shopping list called the basket. The basket is weighted by how American households actually spend their money, based on a large federal survey of spending. Housing is the biggest piece. Food, transportation and medical care are big pieces too.
When people say "inflation was 3 percent," they usually mean the CPI basket cost about 3 percent more than it did a year earlier.
BLS also publishes a separate index for the Houston area, every other month, because prices don't move the same way everywhere.
Why your inflation is different
The official basket is an average household. Nobody is exactly average.
- What you buy. If you drive 60 miles a day, gas prices hit you harder than the average. If you rent, rent increases matter more to you than to someone who owns a paid-off house.
- How often you see it. You see grocery and gas prices every week. You see a cheaper television once every few years. The prices you see most shape how inflation feels.
- Size changes. Sometimes the price stays the same and the package gets smaller. People call this shrinkflation. BLS tries to adjust for size and quality changes, but at the shelf, it still feels like a price increase, because it is one.
- Prices rarely go back down. When inflation slows, prices usually keep rising, just more slowly. Lower inflation does not mean lower prices. That is why things can still feel expensive long after the headlines say inflation has cooled.
Your own index
You can make a rough version for your household. Take one ordinary grocery receipt and save it. A year later, buy the same items in the same sizes at the same store and compare. Do the same with your electric bill, insurance, and what you spend on gas in a month.
It won't be scientific, but it will tell you which parts of your life are getting more expensive the fastest. That is where saving effort pays off most.
What inflation does to savings
Inflation quietly shrinks money that sits still. A simple rule of thumb, called the rule of 72, shows how fast. Divide 72 by the inflation rate to get the number of years it takes for prices to double. At 3 percent a year, prices double in about 24 years. A dollar in a coffee can today will buy about half as much in 24 years.
That is why savings that earn some interest, and retirement accounts that grow over time, matter. The goal is not just to save money. It is to keep it from shrinking while you wait.
What inflation does to pay
The same math works on wages. A raise of 3 percent in a year when prices rose 3 percent is not really a raise. Your pay buys the same as before. Economists call this the difference between nominal pay, the number on the check, and real pay, what the check will buy.
When you look at a job offer or a raise, ask the second question: what will this buy compared with last year?
The bottom line
The government's number is a careful average of the whole country. Your cart is your life. Both matter. The official index tells you where the economy is going. Your own receipts tell you where your money is going.
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Sources
- U.S. Bureau of Labor Statistics, Consumer Price Index: frequently asked questions and how the CPI is calculated.
- U.S. Bureau of Labor Statistics, Consumer Expenditure Surveys (basket weights).
- U.S. Bureau of Labor Statistics, CPI for Houston-The Woodlands-Sugar Land.