The pace of inflation growth has moderated greatly from recent highs. Although the CPI continues to rise, it is relatively close to the Federal Reserve’s target of 2%, but American citizens have a different perception. The reality is that the official inflation basket in the American giant, and also in the euro zone, is disconnected from the real expenses that citizens have. There is a list of services and expenses associated with consumption that are not included in the CPI, in addition to the quality adjustment that the administration uses to assess technical advances in many products, which They distort the citizen’s perception of inflation compared to official figures.
After an inflationary shock like the one that occurred between 2021 and 2023, it is being demonstrated that it is difficult for citizens to erase the perception that price growth is moderating. The increase in lPC has slowed to the current 2.4% in the United States, but citizens maintain a much higher perception.
Stefanie Stantcheva, professor of political economy at Harvard, and founder of the University’s Social Economy Laboratory, published a study in the first quarter of this year that confirms that Citizens’ perception of inflation far exceeds the official figures published by the Administration. “When people are asked about the inflation that has occurred in the last 12 months, what we find is that the median perception is 5%, when the reality, when the study was done, was 3.4%. And If we look at the average, it is close to 7%,” explains Stantcheva. “What inflation has been in the past is overestimated,” he confirms.
This is not an isolated phenomenon in the United States. In the euro zone, at least in 2022, at the height of the inflationary wave, the perception was similar. The consulting firm Simon-Kucher and Partners then explained how, although inflation was at that time at the highest figure in the last 30 years, at 10.2%, citizens perceived that the phenomenon was even higher. In the restaurant sector, for example, an average inflation of 19% was perceived, when it did not even reach 5% at that time.
Many economists wonder why this phenomenon occurs and, although there is no single answer, there are several theories that try to explain it, and all of them can be combined to find the answer to this question. The most obvious is that, after such a strong increase in inflation, citizens take time to adapt to the new prices, and the reality is that, when it is said that inflation is controlled, in the objective of the central banks, the Prices continue to rise at a rate of 2% annually in the CPI, and it is possible that many citizens expected prices to return to the levels prior to the inflationary crisis. Besides, The current growth rate remains higher than it has been, on average, before the Covid-19 pandemic.
However, there is a more obvious issue that explains the divergence between citizens’ perception of inflation and official figures: the composition of the CPI basket itself.
What is not included in the CPI
The CPI is a representative basket that leaves out some expenses that citizens have to assume, one more argument that explains the difference in perception with the official figures. There is a whole list of expenses that have increased a lot in recent years, but that are not part of the official CPI basket. In the United States, for example, tips requested by establishments for their workers can be included; interest on debt on components such as credit cards or the purchase of second-hand cars, home insurance, brokerage commissions for different services, payments for childcare services or dog walkers… etc. Debt interest is one of the best examples, as it is a significant expense for the average American family.
Dimitry Solomakhin, manager of the investment fund Fidelity FAST Globalexplained to elEconomista.es this phenomenon last April. “Inflation is still real. There are the official figures, yes, and if you look at the main categories, it has moderated, yes, but there are others that have not. And, I’m sorry, but real inflation does not fit with that of 2 % or 3%. Not in the United Kingdom, and not in the United States,” the manager explained. This is worrying, among other things, because not taking into account real inflation can have consequences in the macroeconomic analysis, if, for example, the increase in real spending for a citizen is not considered and only the official CPI figures are taken into account. .
In the past it has been proposed that the official price basket include the cost of imputed rentals (the increase in the price of rentals that can be attributed to the owners of houses who live in them), but the reality is that The list of goods and services that have increased in price and are not reflected in the CPI is extensive.. From Bloomberg Specific examples stand out, such as non-taxed tips, gambling activities such as the lottery, which has increased a lot in the North American giant, or other goods such as marijuana, for which the government has not yet included due to the lack of robust documentation, or traffic fines, which have increased. In the end, it is about comparing the increase in the real spending of an average citizen against what the figures show in the CPI, a different metric.
The adjustment for change in quality: hidden source of inflation
There is another phenomenon that may be affecting citizens’ perception of real and official inflation: the adjustment for change in quality that is taken into account in the CPI, both in the United States and in the euro zone. This is a common practice that aims to take into account quality advances in products that are replaced by others in the CPI basket.
The automotive industry is a good example: when a brand replaces one model with another, the CPI basket is updated with the new one and takes into account quality improvements, such as technological advances, to assess the price of the product. Thus, it may happen that the cheapest vehicle on the market costs 15,000 euros, for example, compared to 13,500 euros that its equivalent cost the previous year. However, the adjustment for quality carried out in the CPI basket can lead to determining that this price increase is not real, because it does not take into account the technical improvement of the new car: a touch screen, a larger engine powerful, or a lighter bumper… etc. This, in the end, distorts the perception of a citizen, who knows that he is paying 1,500 euros more for “the same car”, when the official CPI figures indicate that he is paying the same.
In the United States, as stated by the government’s own Bureau of Labor Statistics, this adjustment for quality change is included in products as varied as men’s underwear, to technological devices or telephone and telecommunications services, and It becomes one more element that distorts ‘real’ inflation, that is, what government statistics say exists, compared to what citizens perceive.
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