A new Method to inflation

 For a long time, economists have been looking at the economy as an aggregate; total GDP, economy-wide price level changes, total debt spending and so on. But there has been an ideological shift away from this type of thinking, with Economic thinkers categorising people into different groups based on different measurements, as these people experience the same economy in different ways - this has been very apparent recently; where the working class (those reliant on salaries) have felt a strong squeeze while the capitalist class (those that own assets) have been abel to ride out this struggle with much less pain or even benefiting.

With Gary Stevenson pushing heavily for more policy to help with inequality, which many economists are critical of due to it not fitting into the paradigm of the models they have become accustomed to, yet many can see the impacts and realities of what he is talking about. Even the FED has highlighted the fact that the K-shaped economy is of importance. This is important to this discussion as it highlights how aggregate figures, such as real wages, when split into quartiles, can show very different figures for different classes.

In reality, when inflation hits essentials salary-dependent households experience a compounding loss, while those that are backed by assets are able to see their overall value increase as the price rise of the assets they hold is able to insulate them from this pain.

Now, when it comes to inflation in economics, we look at the aggregate basket adjusted change in prices across the economy, even if the basket for someone in the bottom half of the economy experiences different purchasing habits. When food prices rise like they have, the inflation impacts recently may not even be noticed by those at the top, while the rest of society is often forced out of other markets, as they have to make a much more frugal choice between eating and more luxurious purchases.

The idea of this new way to see inflation is very intuitive, we seperate short term needs from wants in our calculations, and here is the reasoning. Most central banks aim to achieve a 2% inflation target as part of their dual mandate. The idea behind this is that demand-based deflation can harm the economy and lead to deflationary spirals as many people hold off on certain purchases as they would wait for the price to fall at before making them, but the thinking of this seperation of the basket is that no matter how cheap I would believe basic necessities to be in the future would not cause me to save to but them at a later date. This would allow for a different target for these goods, which we would be able to set at a lower rate than inflation.

This is an important adjustment, as looking at empirical changes over my lifetime, we have seen house and food prices skyrocket while the price of TVs and other luxury goods has, in fact, got cheaper to the extent where something like a TV that would be seen as something you have to save up for 50 years ago is now something you can afford in one paycheck. 

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