The difference between the CPI of two periods is inflation. For this reason, it is often mistakenly said that inflation is the sustained and generalized rise in prices. This is not the case, but we will talk about it in another article, so we should not get so confused at the beginning of the year. The CPI is quite important because it is used to see how prices change over time and, consequently, the cost of living. It is used to update salaries, pensions and rents, among others, so it is no small thing.
How is the CPI calculated?
The CPI calculation begins with the selection of a basket of goods and services that reflects typical household consumption. This basket includes products and services from different categories, such as food, transportation, housing, clothing and footwear, among many others (the current basket contains 955 items). The composition of the basket is reviewed periodically to adapt it to changes in the population’s consumption habits. For example, a few years ago there were no mobile phones or air conditioners, to give a simple example.
Each product or service in the basket has a weighting that reflects its relative importance in total household spending. These weights are updated regularly with data from the Family Budget Survey. Obviously, telephone services, to continue with the same example, have increasingly had greater weight. To see how it is calculated we can illustrate it with a simple example.
Suppose that the shopping basket includes the following products: milk: 1 liter; bread: 1 loaf; electricity: 1 month of consumption; transportation: 1 bus pass; apples: 1 kilo; and detergent: 1 package.
In the month of November, the (invented) prices were:
- Leche: 1,20 €
- Pan: 1,00 €
- Luz: 50,00 €
- Transport: €20.00
- Apples: €3.00
- Detergent: €6.00
Total basket cost = 1,20 + 1,00 + 50,00 + 20,00 + 3,00 + 6,00 = 81,20 €
In the current month, prices have risen slightly (the final 0.4% rise is real):
- Leche: 1,21 €
- Pan: 1,01 €
- Luz: 50,20 €
- Transport: €20.10
- Apples: €3.01
- Detergent: €6.01
Total cost of the current basket = 1,21 + 1,01 + 50,20 + 20,10 + 3,01 + 6,01 = 81,53 €
This indicates that prices have increased by 0.4% compared to the base month.
Source: Carlos Arenas Laorga
As seen in the graph, In recent months the monthly CPI has not stopped rising. Be careful, when it “lowers” it is not that prices are falling, but rather that they are growing at a slower rate. That is very important to keep in mind. That inflation went from 3% to 2.8% does not mean that prices have fallen, but rather that they have increased at a slower rate. I’m sorry to repeat it, but it’s very important.
In fact, If we look at the accumulated inflation of the last 4 years we get scaredto use an adjective worthy of an article and not a bar conversation.
Source: Carlos Arenas Laorga
This means that life is 19% more expensive. Otherwise, we are 19% poorer. In just 4 years, a fifth of our purchasing power has disappeared. As if by art of birlibirloque, where before we used 84 euros to make the purchase, now we have to use 100.
Now, we encounter especially rude products on the climbs. For example, more than 150% olive oil. More than 70% fuel. And the list is long: butter, eggs, milk, potatoes, sugar, baby products… all blatantly shot. And we are not talking about the prices of yachts or homes in the Salamanca neighborhood, that too, but about what any consumer has to buy on a regular basis. You can see some examples in the following graph.
And it’s going to go up, I’m sorry to tell you, because the Government is going to increase taxes (again). In fact, on January 1, some tax increases have already come into effect that you will notice in your pocket right now. We will also tell you about them in another article.
Y, why does inflation occur? Is he the evil pistachio or cocoa producer? Does the businessman want to make money at our expense? Are the owner of Mercadona and I of Inditex evil people who want to swim in their pool of gold coins like Uncle Gilito, charged to our pockets? Well, none of that. And when I say nothing I mean nothing. Not a little. But we will explain this in another later article. I’m sorry to leave you with the intrigue of three future articles to fully understand the phenomenon of inflation. But we cannot address an issue so essential for the economy in such a short space.
We already know what the CPI is and how it is calculated. We know that These increases make us poorer. You don’t have to know economics for this, right? Just go buy bread. But we don’t know what causes inflation. Or who. Nor what taxes have been raised. See you soon and, despite these somewhat bleak data, happy new year.
Source: Carlos Arenas Laorga