What do the governments inflation statistics really mean?
Firstly I’m writing from the UK, just in case any Americans get confused (since I know money supply measures etc are different i.e M1 and M2 as opposed to M0 and M4). Basically governments have to find an average for prices. So they construct a ‘basket of goods and services’ which typical households will consume. This ranges from food, fuel, clothes and electronics. Of course these goods change over time with changing tastes, trends and technology. They then put a weight on each of these individual products depending on what they believe it takes up of a typical households consumption. Then they calculate a price index. Basically when they say that inflation was at 4.5% in July, they are saying that on average, prices are 4.5% higher in July 2008 than they were in July 2007. Of course not everyone consumes the exact amount of goods that the government estimates you do. So for example gas prices are rising quite sharply. If the government estimates the average household consumes 100 uni
