Tuesday, April 26, 2011

Not All Inflations Are Created Equal

The United States Federal Government measures what they call the Consumer Price Index (CPI). The use this measure to determine the inflation rate. They then have several costs (to the government) that are adjusted by the inflation rate, or cost of living. When you look at the historical inflation rates, it looks like things have slowed down dramatically. To the right, we can see the rate of inflation according to the CPI. Things have looked pretty calm since 1985. However, when you look at what $1 bought in 1914, and then compare it to what it would cost in 2010 (according to the government CPI data), it would cost $22.32.

It appears that sometime in the early seventies inflation really took off and hasn't really slowed until around 2005. The really scary part is that CPI does not really reflect the true cost of living. They exclude certain items from their calculations. There are certain things that have a much higher inflation rate.

For instance, college tuition inflation has been anywhere from 50% higher to twice as high as the CPI based inflation. It doesn't seem like that would be a big deal, 6% instead of 3%, but that gets compounded over time.

For instance, in our CPI 1914 dollars, in 1958 was worth $12.86. However if we start with $1 in 1958 for college tuition, by 2007 the $1 college tuition is now $27.79 while our 1914 CPI dollar is worth $21.22, or in other words CPI inflation almost doubled ($12.86 -> $21.22) while college inflation was almost 28 times higher.

In the chart to the right, you can see the comparison of college inflation since 1958 vs government reported CPI inflation since 1958.

This is just one of the curious items that seems to greatly outpace general inflation by quite a bit.

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