Thread by @tim4hire

So, I thought I would try to do a 🧵(maybe threads) on inflation. "Everything you wanted to know about inflation, but couldn't afford to ask given today's prices." Caveat lector: I'm not an academic/PhD holder and not opining on the merits any policy actions.
#cdnecon #cdnpoli
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In particular, some comments about CPI, which is the most widely reported measure for inflation. Mainly, what is it and some of its limitations, but why it is still important.

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CPI is the Consumer Price Index. Basically, it is a survey of the prices of a representative basket of goods and services, meant to roughly represent what the average household spends its disposable income on. It is always indexed to a base year.

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The first problem with this measure is that the average person doesn't exist. You might consume more (or less) gasoline, for instance, than the "average", which means that changes in gas prices will have more (or less) impact on you than it has on CPI in general.

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The second problem is that it is hard to capture changes in goods and services. Do you compare the price of an iPhone 14 to that of an iPhone 10 to see if prices of cell phones have gone up or down? There are lots of improvements that are hard to measure.

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The third problem is that CPI doesn't capture *why* a price changes. Often, a price changes because the demand for it has changed (more or less popular), or because the supply of it has changed (war in Ukraine, OPEC changing production, etc.).

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These are different from a generalized change in the price level. So, while we describe changes in CPI as the inflation rate, one can argue that not all changes are because of inflation.

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Which is why, in some contexts like calculating real GDP, the adjustment to account for inflation (the GDP deflator) is not the CPI index but a different calculation method and which can generate a different inflation rate.

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Despite the limitations of CPI, it remains very important, because it is the best measure of what households have to pay to purchase the goods and services that they use. And it does help reveal what is affecting prices and thus may help guide policy makers on their options.

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For instance, the Bank of Canada looks not just at overall CPI but several measures of "core" CPI. Essentially, this tries to correct for more volatile components (goods and services where the price can fluctuate wildly) to get a better sense of the trend inflation rate.

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But while CPI and core CPI are highly relevant to what households are experiencing, they are also abstract statistics and so often do not resonate with what people are feeling.

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A 6.8% annual rate of change in CPI doesn't say much for the households that are having a hard time buying the groceries they need to feed their families (food prices have risen much more than 6.8%). Those - politicians especially - who forget this may face voters' wrath.

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