What 'Official Inflation' Actually Measures
When news reports talk about the inflation rate, they are usually referring to the Consumer Price Index (CPI). Think of the CPI as a massive, standardized shopping basket filled with hundreds of goods and services that a typical urban household might
buy. This basket includes everything from food and housing to transportation and medical care. Government agencies track the total cost of this same basket every month. The percentage change in that total cost over time is the inflation rate. However, the key word is 'typical'. The CPI is a national average, designed to give a broad snapshot of the economy. It is not designed to reflect any single person's actual spending.
Your Spending 'Basket' Is Unique
The single biggest reason for the disconnect is that your personal shopping basket is different from the CPI's. The official index gives a specific 'weight' to each category based on average national spending. For instance, housing makes up a large chunk of the index, while apparel makes up a smaller one. But what if you have a long commute and spend a much larger portion of your income on petrol than the average person? If fuel prices spike, your personal inflation rate will soar, even if the overall CPI only nudges up slightly because other costs, like electronics, fell. Conversely, someone who works from home and rarely drives might not feel that pinch at all. Your individual circumstances—where you live, your family size, your diet, and your lifestyle—create a unique spending pattern that the national average can't capture.
The Problem with Averages and Lag
An average, by definition, smooths out the extremes. Inflation in major metro areas is often higher than in smaller towns, but the CPI blends them together. Furthermore, the items and weights in the CPI basket are based on consumer spending surveys that can have a time lag of a couple of years. This means the index might not immediately capture rapid shifts in what people are buying. If a new technology becomes essential or a particular food item suddenly becomes popular, the CPI might be slow to reflect its price changes in a way that matches our real-time experience.
The 'Feel' Factor and Frequent Purchases
Psychology also plays a major role. We tend to notice price increases on things we buy frequently far more than on items we purchase rarely. You might buy milk, vegetables, and petrol every week, making you acutely aware of every price fluctuation. You probably don't buy a new television or couch nearly as often, so you are less likely to notice if their prices have remained stable or even fallen. This 'availability heuristic' means that the volatile prices of daily essentials have an outsized impact on our perception of inflation, even if they make up a smaller part of our total monthly budget than something like rent or a car payment.
The Sneaky Impact of 'Shrinkflation'
Another factor that makes inflation feel worse is 'shrinkflation'. This is the practice where companies keep the price of a product the same but reduce its size or quantity. Your favourite packet of biscuits still costs the same, but now there are two fewer biscuits inside. The bottle of juice hasn't changed in price, but it's 100ml smaller. While statistical agencies do their best to account for these changes in unit price, they can be subtle and create a feeling of getting less for your money, which is a form of inflation. A related concept, 'skimpflation', is when the quality of a product or service is reduced to save costs, which also erodes value without a formal price change.
