Inflation & Deflation
Why Inflation Feels Worse Than the Numbers Say It Does
Inflation is measured by economists, but it's experienced by a person — and those two things are almost never the same.
The Idea
Every month, statisticians calculate the official inflation rate by tracking a 'basket' of goods: housing, food, transport, energy, healthcare, and dozens of other categories, each weighted by how much the average household spends on it. The number that emerges — the Consumer Price Index, or something similar — is real and carefully constructed. But it describes an average person who doesn't exist, spending money in a pattern that almost certainly doesn't match yours. If you rent in a city, commute by car, and have a young family, you're running a very different inflation rate from a retiree who owns their home, rarely drives, and has no childcare costs. The basket weights what statisticians call the 'representative consumer' — not you specifically. This gap between official inflation and personal inflation is sometimes called 'my-flation,' and research suggests it can diverge significantly from headline figures, especially during periods of rapid price change. There's also a psychological wrinkle. We are exquisitely sensitive to price increases and almost blind to price decreases. When petrol goes up, you notice it every single time you fill up. When it quietly drops back, you register it far less intensely. This asymmetry isn't a character flaw — it's how loss aversion works in everyday life. The result is that inflation consistently feels worse than it actually is, even when the official data is accurate.
In the World
In 2022, as inflation surged across much of the world following the pandemic and the war in Ukraine, something revealing happened in supermarkets: the price of butter, eggs, and cooking oil rose dramatically faster than the headline rate. For households that cooked from scratch — often lower-income families — the inflation they were living with was substantially higher than what the official index reported. Meanwhile, the price of consumer electronics quietly kept falling, as it has for decades, dragging the average down. The British economist Karen Ward illustrated this vividly by pointing out that a single parent buying basics at a budget supermarket was effectively experiencing a double-digit inflation rate while headline figures sat several points lower. The index wasn't wrong — it was just describing someone else's life. Argentina offers a more extreme version of this lesson. Argentines have lived with chronic high inflation for generations, and over time they've developed sophisticated informal strategies: converting savings into physical goods, timing large purchases for just after payday, and mentally pricing everything in US dollars rather than the local currency. This isn't recklessness — it's rational adaptation. When you truly internalise that money sitting idle is money shrinking, you start thinking about purchasing power in ways that most people in low-inflation economies never have to. Argentina's dysfunction is a compressed, painful education in what inflation actually means when it's not an abstraction.
Why It Matters
Understanding that your personal inflation rate differs from the headline number isn't just an academic point — it changes how you should think about your own finances. If a large share of your spending goes on categories that are rising faster than the index (rent, childcare, healthcare), then benchmarking your budget or salary negotiations against official inflation is quietly working against you. It also helps to understand why your intuition feels right even when people tell you 'the numbers don't show that.' Your numbers might actually be worse than the official figures — not because the data is wrong, but because you're not the average consumer. Perhaps most usefully: recognising loss aversion's role in how you feel about prices gives you a small but genuine tool. When something feels catastrophically expensive, it's worth asking whether it's genuinely more expensive in real terms, or whether you're in the grip of a cognitive reflex that treats any increase as a loss. Separating the emotional signal from the economic reality doesn't make the higher price painless — but it stops you making reactive decisions based on a feeling rather than a fact.
A Question to Ponder
If you tracked your own personal basket of goods for a year, which three categories would probably drive your real inflation rate furthest away from the official number — and what would that tell you about where your money is most vulnerable?
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