"The faster increase in prices of frequently purchased items included in the Everyday Price Index helps explain why some people feel that the official Consumer Price Index numbers are at odds with their own perceptions of inflation.”
Great Barrington, MA (PRWEB) February 29, 2012
If you thought you paid a lot more last year for everyday purchases than you paid the year before you are probably right, the American Institute for Economic Research (AIER) reports.
Despite an increase in the official Consumer Price Index (CPI) of just 3.1 percent last year, most Americans saw their day-to-day costs increase nearly three times that amount, about 8 percent, according to AIER’s new “Everyday Price Index.”
AIER’s Everyday Price Index (EPI) “measures the actual price experience of ordinary people” in their daily lives, said Steven Cunningham, research and education director at the independent research organization.
“It’s important to think separately about day-to-day purchasing power and the broader long-term cost of living,” Cunningham points out. “Over the course of a year, the price of hamburger or a pound of coffee may change dramatically. But a car or house payment doesn’t because it’s contractually fixed.”
For this reason, the EPI, a new proprietary research product developed by the nearly 80-year-old organization, includes only the prices of goods and services that the average consumer purchases at least once a month, and that might actually change month to month. These items include food and beverages, motor fuel, electricity and home heating products and services, prescription drugs, child care fees, phone services, personal care products and similar items.
Housing, big-ticket items such as appliances, furniture and cars, and irregularly purchased goods, such as computers and other information technology, are excluded from the EPI.
The frequently purchased products in the EPI make up only about 39 percent of total household spending, but it is changes in the prices of these goods and services that account for the “sticker shock at the gasoline pump and the supermarket check-out line,” Cunningham said.
Explaining the difference between the CPI and EPI, AIER Research Fellow Polina Vlasenko, who helped create the new index, said, “The official CPI is not designed to measure the everyday experience of people. Rather, it is supposed to be a policy guide that reflects broad changes in consumer price levels. The faster increase in prices of frequently purchased items helps explain why some people feel that the official CPI numbers are at odds with their own perceptions of inflation.”
Historically, from January 1987 and December 2011, the CPI increased an average of about 2.9 percent per year, while the EPI increased an average of 3.6 percent per year, more than 20 percent faster, AIER’s research shows.
Until the early years of the last decade, the CPI and EPI trended closely, Cunningham and Vlasenko reported. After 2002, however, the prices of everyday goods and services became much more volatile and began to increase faster than the CPI.
There are several possible reasons for the divergence, Cunningham and Vlasenko said, including the fact that the price-reducing force of technological improvements and globalization have less effect on everyday products than on less frequently purchased items, such as automobiles, computers and consumer electronics.
“Prior to 2002, CPI inflation may have been a reasonable approximation for the price increases people faced in their everyday purchases. But this is no longer the case,” said Vlasenko. “This means that indexing various payments – Social Security benefits, for example – to the increase in the overall CPI no longer adequately compensates recipients for rising everyday costs. This has the strongest impact on individuals who rely on fixed incomes. These people need to plan for essentially uncontrollable changes in everyday costs.”
The EPI will be released on a regular basis by the American Institute for Economic Research throughout the year. If you would like to receive future news releases about the index, please email Sonia(at)PRoactiveSolutionsInc(dot)net.
Editor’s note 1: Dynamic weights – the proportion of total expenditure spent on each good or service purchased each month – are used in calculating the EPI to capture changes in consumer purchasing patterns over time.
Editor’s note 2: Both indices are set to 100 in January 1987 in the two charts for ease of comparison.
Founded in 1933, the nonprofit American Institute for Economic Research (AIER) conducts independent, scientific, economic research to educate individuals, thereby advancing their personal interests and those of the Nation.
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