The poorer the household, the harder inflation hits

Wood materials have increased in price by 200 percent, powdered materials by 50, iron and sheets by 40, and on average, everything in construction is more expensive by 30 to 40 percent. Thus, a prefabricated house built before the first lockdown, which cost 55 thousand euros at that time, now costs more than 74 thousand! Prices of grains and oils have risen by an average of about 40 percent, some have even doubled, transportation costs are up by 9.3 percent, and real estate prices have increased by about the same amount. Yet, the official inflation rate is 2.8 percent annually. When all these figures are put in the same sentence, it seems that someone is playing with our understanding.

How to explain such a discrepancy? From the Croatian National Bank (HNB), whose officially most important task is to maintain price stability, they state that inflation is monitored based on the movement of the consumer price index (CPI) calculated by the State Bureau of Statistics.

– The CPI is calculated based on a basket of about 890 products. Every month, around 38 thousand prices are collected at sales points in nine cities. All goods and services purchased by the population for final consumption are included. Products are included in the CPI calculation if their share in the total expenditures of the reference population is greater than 1/1000 – they say at HNB, adding that core inflation is that part of the overall price movement that must primarily concern monetary policy, as it excludes the impact of specific price changes considered to be transitory phenomena that should not affect monetary policy decisions.

Transitory price changes usually have two sources: the first relates to particularly volatile prices such as crude oil and agricultural food products, and the second to the effects of price adjustments due to government price regulation or tax changes.

However, this still does little to help us understand the gap between what is served to us and what our own reasoning concludes based on experience. The matter is somewhat illuminated by Ivan Žilić, who states that calculating inflation, especially during the pandemic, suffers from several distortions.

– The consumer price index shows how the price of a selected basket of goods moves. However, it is an indicator that focuses on the average basket. During the pandemic, we spent less on cinemas, theaters, and restaurants, food became a fundamental part of consumption, and food prices have risen the most, which means that such a household measures inflation higher than the official rate. After all, different households purchase different goods and consume different services, while the consumer price index only shows an averaged basket of goods that actually represents no one – claims Žilić.

This implies a completely new thing in economics: different households, depending on their consumption structure, have different consumer price indices, or even more drastically – prices rise more for households with lower income, as well as for numerically larger and older households, thus, inequalities also exist in inflation!

Read more about price increases in the new issue of the printed and digital Lider.

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