Cartoon explaining weighted CPI

[muriel_volestrangler]

51. It's a bit simplified

The unchained way of measuring inflation means looking at how people spend their money at one moment in time, then looking at what happens to those prices over the next period, weighted according to the average amount people spent at the start of the period.

Chained CPI means you look at both how people spend their money at the start of the period, and at the end, and work out an average weighting, based on both. Now, since some prices are likely to go up more than others (and some are likely to down, such as high tech), people are likely to start buying more of the stuff that goes up slower (or goes down) in price - we look for value. So the end result is that, typically, the chained index goes up a little slower than the unchained. In the cartoon, rice and beans have gone up in price slower than chicken, so they've wisely bought more rice and beans than before - but that change in behaviour means the cost of living allowance will go up slower. It's called 'chained' because the changes in buying patterns are built into it, allowing the figures for each period to be chained together. If you take the unchained CPI figures, you have to go back and check if there were differences in buying patterns before you concatenate the figures.

I think there's a decent argument that the fact that a few things go up slower should be seen as a bit of redistribution of the benefits of advances in production and technology around society, and so there's no need to use a precise measurement that ends up meaning someone on social security never benefits from any improvement. More than that, however, is the recognised fact that the items the elderly spend money on tend to go up faster than general inflation - they buy less high tech stuff, for instance, and a lot more healthcare. So really, the fair thing to do would be to construct an inflation index for seniors, and used that.