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Inflation - 11/18/14

Many people express skepticism regarding economic statistics provided by public agencies, including measures of inflation.  Part of this is likely based in a fundamental misunderstanding – inflation is not the same thing as cost of living.  One’s cost of living may be rising for any number of reasons, including because one now uses an incredibly capable cell phone, drives a technology-laden automobile, or is sending a child to college. 

Inflation occurs when a particular good or service increases in price from one period to the next.  Over the past year, overall inflation has been running at around 2%.  One of the primary difficulties of measurement is that quality of goods and services changes from one period to the next.  In order to control for this, economists at the Bureau of Labor Statistics who compute the consumer price index and other measures of inflation make adjustments.  

The prices that go into calculating the consumer price index are not the prices consumers actually pay, but what the Bureau calls a Hedonic Quality Adjustment produced through regression analysis.  This adjustment takes into consideration improvements in the quality of goods over time.  To the extent that these adjustments produce inaccuracies, inflation could in fact be mismeasured.

Anirban Basu, Chariman Chief Executive Officer of Sage Policy Group (SPG), is one of the Mid-Atlantic region's leading economic consultants. Prior to founding SPG he was Chairman and CEO of Optimal Solutions Group, a company he co-founded and which continues to operate. Anirban has also served as Director of Applied Economics and Senior Economist for RESI, where he used his extensive knowledge of the Mid-Atlantic region to support numerous clients in their strategic decision-making processes. Clients have included the Maryland Department of Transportation, St. Paul Companies, Baltimore Symphony Orchestra Players Committee and the Martin O'Malley mayoral campaign.