The concept of framing, as elucidated in behavioral economics and cognitive psychology, plays a crucial role in the definition and calculation of various inflation measures. This essay will explore how framing influences our understanding and measurement of inflation, with particular emphasis on the Consumer Price Index (CPI) and Personal Consumption Expenditures Price Index (PCE), while also considering the challenges posed by phenomena such as shrinkflation and skimpflation.
Framing in inflation measurement begins with the fundamental question of what constitutes "inflation." The conventional definition—an overall increase in the prices of goods or services in an economy—already frames our approach to measurement. This framing leads to the creation of "baskets" of goods and services, which themselves represent a particular frame for understanding consumer behavior and economic activity.
The CPI, for instance, frames inflation through the lens of urban consumers, who represent 93% of the U.S. population. This frame, while comprehensive, inevitably excludes the experiences of rural consumers. Furthermore, the CPI's use of a fixed basket of 80,000 items presents a static frame that may not fully capture the dynamic nature of consumer behavior, especially in response to price changes.
In contrast, the PCE employs a different frame, using a chain-weighted index that allows for substitution between goods as relative prices change. This framing acknowledges the adaptability of consumer behavior but may understate inflation as experienced by consumers who do not or cannot substitute goods easily.
The distinction between "headline" and "core" inflation measures further illustrates the impact of framing. By excluding volatile food and energy prices, core inflation frames price changes in a way that may be more useful for policymakers but less reflective of the lived experiences of consumers for whom food and energy costs are significant.
Quality adjustments in inflation measures represent another crucial aspect of framing. The attempt to account for quality improvements in goods and services frames inflation not merely as a change in price, but as a change in value. This framing is theoretically sound but introduces subjective elements into what is often perceived as an objective measure.
The challenges posed by shrinkflation and skimpflation highlight the limitations of current framing approaches. These strategies by producers to disguise price increases—through package downsizing or quality reduction—exploit gaps in the frames used to measure inflation. While statistical agencies attempt to account for these phenomena, their effectiveness is limited by the very frames they employ to define and measure inflation.
Moreover, the different scopes of various inflation measures—such as the CPI's focus on out-of-pocket expenditures versus the PCE's inclusion of employer and government-paid expenses—demonstrate how framing can lead to divergent results. In June 2022, for example, the headline CPI indicated a 9.1% year-over-year increase, while the PCE showed a 6.8% increase. This divergence underscores how different frames can lead to markedly different perceptions of economic reality.
The impact of framing extends beyond measurement to policy responses. Central banks and governments base critical decisions on these framed representations of inflation. If the frames fail to capture important aspects of economic reality—such as the impact of technological change or shifts in consumer behavior—policy responses may be misaligned with actual economic conditions.
In conclusion, the definition and calculation of inflation measures are deeply influenced by framing effects. While current measures attempt to provide comprehensive and accurate representations of price changes, they are inevitably shaped by the frames through which we understand economic activity. Recognizing these framing effects is crucial for policymakers, economists, and the public to interpret inflation data critically and to develop more nuanced understandings of economic phenomena.
As we move forward, it may be beneficial to consider more flexible and diverse framing approaches to inflation measurement. This could involve developing new measures that capture different aspects of price changes, incorporating more real-time data, or creating composite indices that provide a more holistic view of inflation. By acknowledging and addressing the limitations of current frames, we can work towards a more comprehensive and accurate understanding of inflation in our complex, dynamic economy.
Very clear introductory article.
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