Inflation Is Higher Than the Numbers Say

Are the numbers telling the true story behind what is really happening? The recent inflation statistics say prices have risen by 1% over the past year, but yet economic life is seemingly more expensive. "The problem is that measures like real output, real wages and poverty are calculated using inflation adjustments that don’t reflect the higher cost of living during a pandemic. This might help explain why measured poverty has fallen even as lines at food banks have grown." The BLS tracks the monthly percentage change in the price of a basket of goods and services that represents the average American. Typically, the substitution effect occurs when prices rise because people are taking the lower-cost alternatives. This has changed since the pandemic because people are buying more essential items, such as groceries, which is causing prices to rise and buying less non-essential things, such as airplane tickets, which is causing those prices to fall. Also, the pandemic has causes variety shortages. The calculations “impute the price of what a sold-out good would have been if available, effectively ignoring the inflationary costs of pandemic-fueled shortages.” While this rising cost of living may not be a big deal to some, it is directly affecting people on social security and other programs that are linked to inflation. “If inflation were falling — as the official statistics suggest — that would be read as evidence of insufficient demand, as people cut back on their spending. But if inflation is really rising, that suggests that supply side disruptions are a bigger problem than is widely appreciated. The source of these supply disruptions is in plain sight: It’s the virus.”

Wolfers, Justin. “Inflation Is Higher Than the Numbers Say.” The New York Times, The New York Times, 2 Sept. 2020, www.nytimes.com/2020/09/02/business/inflation-worse-pandemic-coronavirus.html.