"If the current inflation rate is only 1.6%, why does my grocery bill seem like it's 10% higher than last year?"
Many of us ask ourselves that question, and it illustrates the importance of understanding how the inflation is reported and how it can affect investments.
Inflation is defined as an upward movement in the average level of prices. Each month, the Bureau of Labor Statistics reports on the average level of prices when it releases the Consumer Price Index (CPI). The CPI is a measure of the change in the prices for a "market basket" of consumer goods and services over a period of time. The CPI is developed from detailed expenditure information provided by families and individuals on what they actually bought in eight major categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other groups and services.
Many find that the government's "basket" doesn't reflect their experience, so the CPI, while an indicator of the rate of inflation, can come under scrutiny. For example, the CPI rose 1.6% for the 12-months ended January 2011 – a modest increase. However, a closer look at the report shows movement in prices on a more detailed level. The CPI breaks out gasoline prices, which rose 13.4% for the 12 months.
What's been your experience in the past year? Are prices up or down when you go shopping?