Your grandma cares about the CPI. If it indicates the price level is rising, then she will automatically get a COLA–a cost of living adjustment that elevates her monthly social security check.
This video from NPR’s Paul Solman shows how CPI statistics are gathered. BLS (Bureau of Labor Statistics) staffers visit businesses. Every month they price melons, houses, cars and other goods and services. Try to imagine a CPI market basket filled with the typical things we buy. Look at where its price moves monthly and you have the CPI.
Now, the FT reports that Google is doing something similar. Through virtually countless (virtual) transactions, they are creating their own price index. Rather then monthly, Google is collecting its data constantly.
People complain about the accuracy of the CPI. Saying it affects everything from billions of dollars of Social Security payments to Federal Reserve decisions, they say it usually understates inflation. More accuracy would save us money.
Is Google the answer?
The Economic Lesson
The CPI is one of the yardsticks used to measure inflation. Simply defined, inflation involves rising prices. If the same item has a higher price, then the money buying it is worth less. Typically, economists say an inflation rate of 2% or less is desirable. It is okay for something that costs $1.00 this year, to cost $1.02 next year and $1.05 the following year. With accurate inflation data, businesses can predict costs and revenue, consumers can easily adjust, and government can assess macroeconomic policy.
Here, we discussed the other extreme inflation scenario.