## 05 May 2008

### Breaking down inflation

An interesting informational graphic: All of Inflation's Little Parts, from Saturday's New York Times. This is a graphic that breaks up the many parts of the standard "basket" that is used by the US government to compute the inflation rate.

Of course, nobody is exactly average. To take an example dear to my heart, 0.1% of this basket is "books". But how many people do you think spend exactly that portion of their income on books? My instinct is that the distribution of "percentage of income spent on books" (and a lot of the other small items) has a long right tail. Plenty of people I know (who are of course not a uniform sample) spend, say, two or three percent of their income or more on books -- and it's my understanding that the book industry relies quite a bit on people like us.

Somewhat more seriously, 23.9% of the basket is "owner's equivalent rent" (what homeowners would pay if they were renting their homes) and 5.8% is actual rent. That means that a typical household making, say, \$50,000 a year spends about \$1,000 monthly on the house they own (or would, if we weren't having a housing bubble), and \$250 monthly on rent. But it's very hard to imagine a household that actually does that! The mean and the mode, in distributions like this, are very different. It would be quite surprising, I think, to find someone whose spending breaks down exactly as in the graphic.

Anonymous said...

It seems to me that there should be a section for "interest rate", since that is where a big chunk of most peoples money goes. If you have a lot of credit card debt, or an ARM then you are sensitive to changes in the interest rate. Certainly seems more relevant than "owner equivalent rent".

Owner equivalent rent reminds me of those silly price tags some stores have where they say something like \$39.95 compare at \$85. Why would I compare it at \$85? I'm comparing this product at \$39.95 to some other product I can by at x dollars. They both seem like you are trying to put some kind of value on money that you aren't spending anyway.

About the only thing the graph shows clearly is how irrelevant the inflation numbers may be to individual people.

Michael Lugo said...

That's a good point about "interest rate"; I didn't catch that omission, probably because it's not something a lot of my money goes to.

There are some other strange things going on in that graph, too; "health insurance" is marked at 0.5%, which is certainly less than most people pay in health insurance premiums. (Would the rapid rise in health insurance premiums be such an issue in the current presidential campaign if they were only 0.5% of people's expenditures?)

"Owner equivalent rent" kind of makes sense to me; it's an attempt to separate housing-as-shelter from housing-as-investment. But it also seems like it would be way too easy to play with those numbers to make inflation lower or higher. I know what my actual rent is; it's the number on the check I write each month. People who have a mortgage payment know what it is. But does the person who owns a house know what it would rent for? (And is that even a meaningful question in some cases? Certain combinations of house size and location strike me as the sort of houses for which there basically isn't a rental market.)

Anonymous said...

That was an interesting graphic.

What is the name of the graphic type? Is it a Voronoi diagram?

One of the things that surprised me was the omission of Payroll, Federal, State and Local taxes.

Also I was surprised at the relatively high proportion spent on insurance for both transportation and medical.

Good point Steve S. It would make more sense if the diagram tracked all committed expenditures as well.