Understanding the Discrepancy Between Perceived Inflation and Consumer Price Index
In our daily lives, we experience the fluctuation of prices. Housewives notice it in their market baskets, office workers feel it in their coffee or lunch expenses, and students sense it in the costs of books and school supplies. However, there are times when the inflation perceived in everyday life differs from the inflation reported by official agencies. What could be the reason for this disparity?
Factors Influencing Perceived Inflation
Discrepancy in Item Importance
The difference arises from the varying importance of items used in calculating the consumer price index and the items consumed by individual households. For instance, while an increase in tuition fees might be offset by an expansion of medical subsidies leading to no overall change in the price level, students from households where education expenses form a significant portion may feel a substantial rise in inflation. Conversely, households with patients may perceive a relative decrease in prices.
Rising Living Standards and Spending
Improvements in living standards or increased expenditure due to a child’s growth can be misconstrued as inflation. For example, relocating to a larger house leading to higher apartment management and electricity expenses, or upgrading to premium televisions and refrigerators could be mistakenly interpreted as inflationary trends.
Psychological Factors
People tend to focus more on items that have significantly increased or decreased in price, leading to a perception of inflation based on these selective changes, even if the overall price level remains stable.
Limitations of CPI Calculation
The fixed weights assigned to items in the Consumer Price Index may fail to promptly reflect shifts in consumer spending patterns. If the weight of communication expenses, for example, significantly increases due to a surge in mobile phone usage, but this change is not yet reflected in the index, the perceived inflation by the public could differ from the official index.
In conclusion, the discrepancy between perceived inflation and the Consumer Price Index can be attributed to a combination of factors including the importance of items used in index calculations, changing consumer spending patterns, psychological biases, and the limitations of the CPI calculation method. Understanding these factors is crucial in accurately interpreting inflation trends and their impact on individuals and households.