Just like when you are driving your car, you need to watch the needle to be aware of your speed, the rounds per minute to understand if your engine is overheating or not. (Listen to the podcast post here).
The most widely used indicators on that Dashboard are usually the CPI and the PPI (consumer price index, producer price index). We pay a lot of attention to them but many commentators and observers forget to scrutinize how they are constructed and how they are built. Many countries have different weights for different baskets of goods and services. However, because inflation is such a personal experience according to the level of income, these baskets and weights may not reflect as faithfully as possible the daily impact that price increases have on people. And because we have gone through a period of very low inflation in the last few years, we barely paid attention to how these indices are actually built.
And, again, because inflation remains such a personal experience, we also have to consider who is analyzing inflation and from what perspective. We will elaborate a lot more in coming posts. Right now I am just giving you an overview.
But all I can say is the following; based on where these analysts are located and what generation they belong to, their analysis will change. You have to be aware of that. Personally, I have actually lived and actually worked in 6 different countries, 4 different continents. I am not talking about spending a few days here and there, in a fancy 5 star hotel, for vacation or during a quick business trip. I am actually talking about spending several years in that country and paying taxes locally. That’s the only way you can actually understand what is happening. That’s why I have reached the conclusion that a perspective about inflation can only be partial. It’s like in the parable of the elephant that the Sufi poet Rumi wrote. He talks about how an elephant had been exhibited in a dark room. Several people came into that room but the darkness in that place did not allow anyone to see what was in the room. They all used their hands to touch and feel what was there. Some touched the ears, and concluded that the elephant must be a large fan. Others felt the trunk and thought the elephant is a water pipe. Others caught the leg and concluded the elephant is a pillar. Others touched the back of the elephant, and concluded the elephant is a throne. So based on the part that everyone touched, everyone had a different assessment about that they touched. So as Rumi said, the “eye of the outward sense is as the palm of a hand. The whole of the object is not grasped in the palm.”
And it’s the same for inflation. No matter how you look at it you will have different perspectives according to the vantage point you are using to observe it.
Here is what it means in a more concrete and tangible way. The composition of the indices that measure these price changes is different from one country to another. Within the same country, it’s also very likely that consumption habits are not the same from one consumer to another. This is where inequality in income plays a role. If you belong to a higher income bracket, chances are that you are much more likely to remain less affected by that increase in that cup of coffee at Starbucks than anyone else at minimum wage.
So, you can see that price increases will tend to affect people differently. That difference stems from the fact that the composition of consumption is different from one person or household to another. That’s why the official statistics published by the respective national statistical offices will feel different from what people actually experience. It’s not unusual for the great majority of people to feel that price increases were a lot higher than the average statistics published by the statistical offices. So that’s why inequality in income is really crucial here, because it would be very easy for decision makers and politicians to conclude by mistake that the official number is a one size fits all number for everyone.
That’s what the great poet Rumi really meant “The whole of the object is not grasped in the palm.” He was not an economist, but it feels that the way he looked at the world can be very helpful for us, in the present times.
Thank you again for your attention and looking forward to talking soon. Feel free to share your thoughts and make comments. I will reply directly.