Inflation rates last 10 years – the truth?

You want to know the inflation rates over the last 10 years?

I have collected some data for you, but the truth is, that the inflation rate is very difficult to measure.
There are 2 main concepts how to calculate the inflation rate.

First of all they construct a basket of goods and then look, how it is changing over time.
This basket is set to 100. The basket contains all the goods for Joe Average.
Problem: You are not Joe Average. Your consumer basket may look very different. Therefore, you “feel” a different inflation rate and your feelings may be right, because you look at a different basket.

This price change can be calculated in two different ways:

a) Laspeyres
If you calculate the price index this way, you choose a starting date (year) and assume, that the quantities and qualities remain the same over time.

b) Paasche
If you calculate the price index this way, you choose your starting date today and calculate backwards.

The main problem is that the quality of the products changes over time. Think about a car 10 years ago or a computer 10 years ago. You can hardly work with a ten year old computer.

This goes hand in hand with another point: The expenditure changes. Ten years ago, nobody bought a smartphone or iPhone because it wasn´t available Today it is a normal part of our products, which we buy.

To solve these problems the authorities build another index. This index changes every year / month its composition. It´s called chain index.
The disadvantage: You can´t compare year to year because it changes.

Nevertheless the chain index is used to calculate the inflation in Europe and also in the United States.

Consumer Price Index (CPI) in the United States

Consumer_Inflation_BLS_2005_2015
Click to enlarge

This chart provides the official 12 month changes for the last 10 years, starting in 2005:

You can see the sharp decrease in inflation during the financial crisis in 2008 / 2009. Furtheron you can see, that the inflation increases again, but was slightly smaller than the years before the financial crises. Furthermore we recognize, that the inflation dropped to zero in the last year.

Consumer Price Index (CPI) in the United States – an alternative concept

Consumer_Inflation_ShadowStatistics_1990_2015
Scource: shadowstats.com

The United States made a significant change in their concept to calculate the official inflation rate.

  • CPI no longer measures the cost of maintaining a constant standard of living.
  • CPI no longer measures full inflation for out-of-pocket expenditures.

John Williams still calculates the inflation rate in the old manner and compares it to the official inflation rate.

As you can see in the picture the official inflation rate (orange) is now a lot lower, than it would be, if we would use the old calculation (blue).

Consumer Price Index (CPI) in Germany

Consumer_Inflation_Germany_2005_2015
Click to enlarge

For comparison I added the inflation from Germany. As you can see the chart looks similar to the United States. This shows among others, that the major countries have similar developments.
But you can see, that in 2006 the annual change was about 3% and in the US it was nearly 6%. If you compare it with the alternative concept by John Williams, its even 9%.
During the financial crisis the annual change of the inflation rate dropped in Germany to zero, but in the United States it dropped to minus 2%. This means deflation. But if you look at shadow statistics, there was no deflation. What is the truth?
I think somewhere in between.

Consumer_Price_Index_Germany_2000_2015
Click to enlarge

The pictures show the rate of change. You can also print the development of the Consumer Price Index over the time. You will get a different image. The line goes from the lower left corner to the upper right corner. This makes you feel that the inflation is an issue and that it is rising.

If you want to take a closer look at the inflation rate in European countries, you can it here.

 

Is inflation good or bad?

scales-308063Today the central banks all over the world say, that the inflation rate is too low and that they want to increase it to 2% (European Central Bank) or even more (FED). What is wrong with a low inflation rate?
If you have some cash, a low inflation or even a negative is great. You can buy more things with the same money.
Now look the other way: You borrowed some money to invest. You sell your stuff, but you can sell it only for a lower price. To get the same profit you have to sell more. You can´t sell it with a higher price because of the deflation. You will suffer less gain or even a loss.

That is the reason because Central banks don´t like deflation. Therefore they will do “whatever it takes” (Mario Draghi) to increase inflation. Even if they can´t stop the inflation, if it starts to go through the roof.
They will print more and more money.
The only question is:
Who prints faster: The FED, the ECB or Japan?

This can be the reason that you feel another inflation, as reported by the authorities.

 

 

5 thoughts on “Inflation rates last 10 years – the truth?

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  • 20. March 2016 at 17:18
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    Hi

    This was a good read, I honestly don’t know a lot about this sort of thing so it was good to read. This is the kind of thing that just keeps happening under our noses and we continue to pay and don’t really realise whats going on, thanks for the awareness.

    Reply
  • 21. March 2016 at 15:35
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    Enjoyed this article! Your writing makes it interesting even though I don’t know much about how inflation is calculated. Really liked the graphs and images too 🙂

    Reply
  • 28. March 2016 at 20:29
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    Very informative post!

    I loved learning about inflation in school and this article did a great job digging a little deeper then what I was taught. I loved all the comparisons with the charts. I am a much more visual learner then just reading something. So to say the least, your visual aids were very appreciated.

    Great post!

    Reply
    • 29. March 2016 at 10:15
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      Hello Derek,
      thanks for your comment. Yes, I love also the charts. They tell me more than 1000 words. I’m glad, that I could improve your knowledge about inflation by the charts. I will write more about economics and I would be glad to see you here again. Thanks

      Reply

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