What’s your inflation rate?

On Wednesday, the Nudge blog linked to David Leonhardt’s Wednesday column on people’s perceptions of inflation.

Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. If you have to sell your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago.

For most people, the Consumer Price Index (or core inflation, if you prefer) is a relatively meaningless number – even if it provides a better picture of inflation than a gallon of gas. More meaningful is your personal inflation rate; the increase in prices of items in your household budget weighted by the amount of each item your buy.

Continue reading the post here.

Tags: inflation, loss aversion