"Since there are no prices for the output of the public sector, estimating this index involves taking the increase in government spending and adjusting that for the "real" increase in what public spending buys. And if you think it is easy to measure that then you are a better man than me, Gunga Din.
"Even measures which restrict themselves to household spending show quite a divergence. The overall household spending deflator, which covers a wider spectrum of household spending than the CPI, shows inflation at 1.8 per cent, not that different from the CPI, while the retail sales deflator, which covers a narrower range of household spending than the CPI, shows inflation at minus 1.1 per cent."
Click image to enlarge
(image nicked from the Telegraph, but hosted by me - I only steal intellectual property - not bandwidth)
Interesting stuff this."Yet widespread scepticism about the CPI cannot entirely be put down to an illusion. When different things are rising at very different rates, what does "the" inflation rate mean? The statisticians who compile the CPI attempt to measure the overall increase in prices by weighting the increase of each individual component of the index by its share in overall spending.
"Of course, very few people will have an expenditure pattern which exactly mirrors this average weighting. Each person effectively experiences a different inflation rate, depending upon their own mix of expenditure. If you are a heavy buyer of clothing and footwear, CDs and household furniture you should not be complaining. On the other hand, if you have children at private school and are a heavy user of hotels and restaurants your own personal inflation rate is in a different parish from the official CPI measure."
Hat-tip: Prestopundit.
