You must be financially better off than your parents, but not earn more than DKK 75,000 per year.
One must believe in God and the literal truth of the Bible.
One must live within three miles of a McDonald’s and two miles of a public park.
In the end, O’Keefe discovered that the average American is, up close, pretty extraordinary. Same for Aam Aami/Aurat I suppose. So the CPI curve and the corresponding weights can be constructed in an objective way, such as by a carefully designed survey of income and consumption. Or, in the absence of such survey data, by the ‘wisdom’ of a few ‘experts’. By comparing the current prices of this set of goods and services with their past prices, inflation can be calculated. Whether a gold ornament or a bar of Swiss chocolate would end up in this basket is undoubtedly a difficult question.
With inflation on a slippery slope in this pandemic-ravaged world, do we really need a ‘robust’ measure? There are undoubtedly some. In the US, the Federal Reserve Bank of Cleveland’s trimmed average CPI gets rid of ‘noise’ by excluding the components with the most extreme price changes. The median CPI reflects only the change in price at the center of the distribution. The change in prices excluding volatile goods such as food and energy is also referred to as ‘core inflation’, which is often seen as a better indicator of underlying price fluctuations. However, food and energy are key components of every household’s budget. According to a paper published in the May 2021 issue of the Journal of Political Economy (bit.ly/3YWk5ZJ), consumers rely on price changes of items in their personal grocery packages when forming expectations about overall inflation.
In early 2022, anti-poverty campaigner Jack Monroe was ‘furious’ because the CPI ‘grossly underestimates the real cost of inflation as it happens to people with the least’. For example, the price of rice in Monroe’s local supermarket had risen by 344% in a year, from 45 pence per kg to £1 for 500g. Instead of the CPI by the UK government’s Office for National Statistics (ONS), Monroe proposed the ‘Vimes Boots Index’ – named after the thoughts of Terry Pratchett’s character Sam Vimes in the 1993 ‘Discworld’ novel, But that Arms, about how poverty causes greater expense to the poor than to those who are richer using a pair of boots as an example. Monroe’s index was intended to be a record of the prices of the cheapest staple foods over time.
Pratchett explains: ‘A really good pair of leather boots costs fifty dollars. But an affordable pair of boots that were pretty OK for a season or two and then leaked like hell when the cardboard gave out cost around ten bucks. These were the kind of boots Vimes always bought… A man who could afford fifty dollars had a pair of boots that would still keep his feet dry ten years from now, while a poor man who could only afford cheap boots , have spent a hundred dollars on boots at the same time and still wanted wet feet.
Recognizing the shortcomings of their existing methods, the ONS published an experimental report in October 2022 which is essentially the Vimes Boots Index in all but name. It measures the actual change in the cheapest staples between April 2021 and September 2022. No matter if it’s an expensive boot or a sturdy slipper, measuring inflation remains smooth.
The author is Professor of Statistics, Indian Statistical Institute (ISI), Kolkata