The Economic Perspective: “The Battle over Accounting for Inflation”

I’m Mary Walden, with economist MW, welcoming you to the economic perspective.  Today’s program looks at the battle over accounting for inflation.  Mike, many federal programs that provide financial assistance to qualified households are annually adjusted for inflation.  This allows the purchasing power of the assistance to be maintained over time.  But I understand there’s now a debate over the best measure of inflation to use in these calculations.  What’s the debate about?

Mike: Summary Answer

  1. Current measure of inflation is based on a fixed market basket – meaning calculations assume people continue to buy same products despite changes in relative prices; market basket is changed only infrequently
  2. Alternative measure of inflation allows the market to change monthly – allowing, for example – people to buy less beef and more pork when beef prices rise and pork prices don’t
  3. Economists have long argued this is a better inflation measure because more accurately measure what people actually buy
  4. Opponents say it results in slower changes in financial support, and they are correct
  5. Question becomes whether want the best measure of true inflation
  6. I’m MW

Mary:  And I’m Mary Walden for the Economic Perspective, an NC State Extension program from the Department of Agricultural and Resource Economics.