The CPI, inflation, and the cost of living : a proposal

Inflation is the percentage change in the CPI over a given period of time. It is usually calculated over a year (year-on-year inflation) and over a month (month-to-month inflation). Even if prices are not currently rising from month to month, the year-to-year inflation rate could still be positive and high. As shown in this article, it is possible that, during a certain period, the cost of living in a given month is the highest but the year-on-year inflation in that month is the lowest. The cost of living and the inflation rate may move in opposite directions. This accounts for the well-known difference between measured (official) inflation and consumers’ perceived inflation. Using the CPI, I propose a simple solution that unambiguously ensures that a fall (a rise) in the inflation rate indicates that we are getting closer to (farther from) a ‘target’ cost of living.