by Joshua R. Hendrickson
The American Institute for Economic Research
In the aftermath of the pandemic, the United States experienced the highest rates of inflation of the last four decades. More recently, inflation rates have been trending lower. Nonetheless, a number of economists have been surprised to observe that consumers aren’t very happy despite signs that the inflation rate is on a trajectory towards the Federal Reserve’s target of two percent. Although a number of economists have been quick to dismiss consumer pessimism or explain that things are actually quite good, a recent paper by economists at Harvard and the IMF offers an explanation for pessimism: perhaps consumer measures of the cost of living differ from the price indices that economists use to measure inflation.
A price index is just a weighted average of prices. People often reference the price index as capturing “the cost of living.” This is indeed the purpose of constructing a price index.