The CPI, Inflation, and the Cost of Living: A Proposal

J. Atsu Amegashie

No 11973, CESifo Working Paper Series from CESifo

Abstract: 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.

Keywords: annual inflation; consumer price index; cost of living; monthly inflation; perceived inflation (search for similar items in EconPapers)
JEL-codes: E31 H25 J31 (search for similar items in EconPapers)
Date: 2025
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