Here is a fact that is perfectly true and almost entirely useless: between us, Usain Bolt and I have won an average of four Olympic gold medals each. Usain has eight and I have none, a distribution the average conceals rather well, along with the fact that I have never run 100 metres in under ten seconds or, if I am honest, in under fifteen. Averages have a habit of being mathematically correct while telling you very little about the individual standing in front of you.
The United States Air Force learned this at some cost around 1950. Its pilots, many of them highly capable, kept losing control of aircraft that ought to have been well within their abilities, and among the possibilities investigated was whether the cockpit still fitted the people sitting in it. The remedy seemed obvious enough: measure a large number of pilots, establish the dimensions of the average airman and build the cockpit around him. More than 4,000 pilots were duly measured, from height and chest to the length of their arms and legs.
A young lieutenant called Gilbert Daniels, who had studied physical anthropology at Harvard, decided to test the premise before anybody built anything on it. He took ten of the dimensions considered most relevant to cockpit design and asked how many of the 4,063 pilots fell within the average range on all of them.
The answer was none. Plenty of men were average in one respect or another, but nobody was average in every respect at once, which meant that a cockpit designed for the average pilot had been designed for a man who did not exist. The Air Force’s response was to stop looking for him and to require equipment that fitted the range of people actually doing the flying, which is how the adjustable seat found its way into military aircraft.
The Consumer Price Index is built on much the same idea as that original cockpit. Statisticians track the prices of a basket of goods and services bought by the average household and weight each item according to how much of the average household’s budget it absorbs. The result is a carefully constructed figure, and a useful one for some purposes, although it describes the experience of remarkably few actual households. At the time of writing, the official figures put annual inflation at 3.7% in the United States and 3.5% in the United Kingdom in the year to September, with Ireland’s flash estimate for October at 4.0%.
Anyone who has done a weekly shop recently might give you a slightly puzzled look if you suggested those numbers captured what has happened to their bills. The statisticians have not got their sums wrong; they have simply measured somebody else’s basket.
The central banks, meanwhile, have built their policy around the same composite household. The Federal Reserve, the Bank of England and the European Central Bank all aim for inflation of 2%, each measured on its own slightly different average, so a great deal of institutional effort goes into steering a number on behalf of a household nobody has ever met. Less often mentioned is what success looks like. Prices rising at 2% a year compound to an increase of roughly 22% over a decade, which means money held across those ten years loses a little under a fifth of its purchasing power even when the target is met precisely. That is what price stability means in practice, and it assumes your own inflation is average, which for most people it is not.
Although we all shop in the same economy, none of us buys quite the same basket, and our personal inflation rate depends on two things: what is in that basket, and how quickly the prices of those particular items are rising. Housing is the natural place to start, being the largest bill for most households and the one where experiences diverge most sharply.
A tenant lives from one rent review to the next; a mortgage holder can find costs jumping when interest rates rise, sooner or later depending on the type of mortgage; someone who has paid off the house is touched by neither. Three neighbours on the same street can therefore be living through three entirely different rates of inflation while reading the same headline figure.
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Who sits around the table makes a similar difference. A family feels the cost of food, childcare and schooling, along with clothes that are outgrown well before they are worn out, while somebody living alone carries every bill without anyone to share the heating or the broadband. Neither resembles the average household, which in this respect has a good deal in common with the average pilot.
The contents of the trolley vary too. If you live largely on beef and coffee and both prices climb, your food inflation will run well ahead of a neighbour who lives on pasta and tea, and your choice of brands, your habits and even what the dog eats all feed into your figure. The official basket assumes everyone buys a little of everything, which is a reasonable statistical convenience and a poor description of anybody’s shopping.
Age and health pull baskets further apart. Younger people tend to spend more of their money on rent, transport and going out, while older people spend more on heating, insurance and healthcare, and anyone managing a health condition may face costs rising at a pace the official figures never register. Where you live and how you get about do the same. Somebody in the countryside who drives everywhere feels every movement in fuel prices each week, a home heated with oil faces a different bill from one connected to gas, and a city dweller who walks or takes the bus is dealing with a different set of prices altogether.
Income ties several of these threads together. The less a household earns, the larger the share of its spending that goes on essentials such as food, energy and housing, and those are often the prices that rise fastest. Higher earners devote more of their budgets to things they can postpone or do without. This is a matter of arithmetic rather than politics, and it means that two households facing identical price changes can still experience quite different rates of inflation.
There is also the gap between the inflation we have and the inflation we feel. We buy bread, milk and fuel every week and a television perhaps once every five years, so our instincts give most weight to the prices we see most often, and those tend to be the ones climbing.
This goes some way to explaining why the official number so rarely feels right. Thanksgiving and Christmas offer the purest version of this, since the turkey, the crackers and the bottle of something decent are bought once a year and judged against a memory that is twelve months old and probably a little generous. PNC, the American bank, has for more than forty years published a Christmas Price Index costing the gifts in “The Twelve Days of Christmas”, a basket nobody has ever actually bought, which makes it rather a good illustration of the point: its inflation rate belongs to the swans and the pipers rather than to any particular household.
In fairness, some people’s personal inflation will be lower than the official rate, which only reinforces the point that the figure is a personal one.
Working out your own rate requires no statistical training, only about half an hour and last year’s bank statements. List your main regular costs, including housing, energy, food, transport, insurance and childcare, then note what each cost a year ago and what it costs now. Add up both columns and compare the totals, and the percentage change between them is your personal inflation rate. It will not be perfect, but it will be considerably closer to your own circumstances than any headline figure.
Once you have that number, a good deal begins to look different. If your savings earn 3% while your personal inflation runs at 5%, you are losing roughly 2% of your purchasing power each year, whatever the headline rate says. The same reasoning applies to a pay rise, a pension or a long-term savings goal, each of which needs to be judged against what has happened to your own costs rather than to the average household’s.
The same test can be applied to whatever we hold to protect our savings, gold included. Gold pays no interest and its price in pounds, dollars or euros moves for many reasons besides inflation, so the more useful question is what an ounce would buy from your own basket today compared with ten years ago, whether counted in weekly shops, tanks of fuel or Christmas dinners.
Over the half-century since the dollar’s link to gold was cut, gold has more than kept pace with the cost of living in the major currencies, although not reliably and not on every timescale: anyone who bought near the January 1980 peak waited the better part of three decades to see that price again, even before allowing for inflation. It is better judged against your own costs, like everything else, than treated as a guarantee. Planning around somebody else’s inflation is rather like flying in a seat set for somebody else’s arms and legs.
The Air Force did not solve its problem by finding a better average; it solved it by letting each pilot adjust the seat. We can do much the same with inflation. The official figure is a useful instrument for running an economy and a far less useful one for running a household, so it is worth finding your own number and planning around that, after which you can sit back and enjoy your average of four Olympic golds.
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