How to read an inflation number without being fooled
Every month a statistics office announces an inflation rate, the news reports it, and people argue about whether it matches real life. To join that argument properly you need to know what the number is measuring.
It is built from a basket
Statisticians track the prices of a fixed list of things a typical household buys: food, rent, transport, clothing, school fees and so on. This list is the basket, and its total cost, turned into an index, is the Consumer Price Index (CPI).
The inflation rate is the percentage change in that index, usually compared with the same month one year earlier.
Here is a made-up example to show the arithmetic.
| Last year | This year | |
|---|---|---|
| Cost of the basket | ₦100,000 | ₦125,000 |
| Change | ₦25,000 | |
| Inflation rate | 25% |
Falling inflation does not mean falling prices
This is the mistake almost everyone makes. If inflation drops from 25% to 20%, prices are still rising. They are only rising more slowly. The car is still moving forward; the driver has merely eased off the accelerator.
Prices actually falling is called deflation, and it is rare.
Why your experience can differ from the headline
- Your basket is not the average basket. If you spend most of your income on food and food prices rise fastest, your personal inflation is higher than the official figure.
- Location matters. Prices move differently from one city or state to another.
- Food and energy swing the most. That is why reports often quote a separate "core" figure that leaves them out, to show the underlying trend.
Three questions to ask of any figure
- Compared with when? Last month, or last year?
- Which basket? Headline, food, or core?
- Is the rate falling, or are prices falling? They are not the same sentence.
This is a sample lesson, written to show how the site looks and reads. It will be replaced with Stratejik-9000 Consult's own teaching.