Eli5: Inflation YOY vs Multiple Years
I know there have been multiple questions here around inflation, but I haven’t seen this aspect brought up:
I get core inflation is a different number, but how do we measure/account for inflation over multiple years?
For example, if my normal grocery trip is $100 in 2021, and by 2022 inflation is at 8%, my same grocery trip would be (approximately), $108. If, in 2023 inflation has risen another 4%, my bill would be up to about $112.32. This year, if inflation is about 3%, I’m up to about $115.69.
So even though inflation is “cooling” to 3 or 4 percent, over the last few years my standard grocery bill has risen more than 15%. If, during the same time, I haven’t received an additional 15% increase in wages, I’m in a worse spot financially than before.
How do we label/account for that surge over several years verses the “normal” inflation rate, which my understanding is measured by growth year over year?
In: Economics
I feel like you’re over-thinking this a bit. There’s not really anything complex about it.
There are two main ways of doing it
The first is exactly what you’ve done. Just calculate the total increase in prices over the years you’re looking at. Which, if the increase is modest you can approximate just by adding up the percentages.
The second is to index a particular year as 100, and then show other years relative to that.
For example, if you look at the [Office of National Statistics estimate of UK Consumer Price Inflation for January](https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/january2024) you can see a table that uses 2015 as a benchmark.
With the 2015 price index set as 100, the price index in Jan 2024 was 130. (This also makes it easy to see the % change, which is 30%.)
Latest Answers