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

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  • J. Atsu Amegashie

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.

Suggested Citation

  • J. Atsu Amegashie, 2025. "The CPI, Inflation, and the Cost of Living: A Proposal," CESifo Working Paper Series 11973, CESifo.
    • Handle: RePEc:ces:ceswps:_11973
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    More about this item

    Keywords

    annual inflation; consumer price index; cost of living; monthly inflation; perceived inflation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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