On Tuesday, the Bureau of Labor Statistics announced that the US Consumer Price Index (CPI) rose Mike Bryan on the Atlanta Fed’s Macroblog has made me think again.
at a seasonally
adjusted annual rate of 3.13 percent in June. What does such a figure
really mean? Is it a measure of inflation or of the change in the cost
of living? Until recently, I would have answered that there was no
difference, but a recent series of posts by
What’s the difference?
Bryan explains it, the cost-of-living concept arises from the role of
money as a medium of exchange. When we say the cost of living increases,
we mean that it gets harder to maintain a given standard of living on a
given income. Either we have to be satisfied with fewer goods or
services, or save less, or work harder. In the language of economics, a
change in the cost of living is a real phenomenon.
other hand, we can best understand inflation as a change in the value
of our unit of account, the dollar. When there is inflation, the value
of the unit is smaller each day than it was the day before, for all
transactions. This earlier post includes a chart showing how dramatically the value of our unit of account has changed over the past 100 years.
that you woke up one morning to find that someone had chopped an inch
off all our rulers, so that today’s foot was now only as long as
yesterday’s eleven inches. You might go from being six feet tall to
six-foot-six, but it wouldn’t be any easier for you to reach the top
shelf in the kitchen without a footstool. Similarly, if inflation raises
both your income and the prices of everything you buy by the same
percentage, the value of a dollar as an economic ruler shrinks, but it
is neither harder nor easier to maintain the same real standard of
living. In that sense, inflation is a purely nominal phenomenon. >>>Read more
Follow this link to view or download a brief slideshow with charts of the latest CPI data