Inflation's real cost

As the price of flour, milk and rice increases, Americans find that inflation forces them to dig deeper into their wallets.

Welcome back Issue No. 1 here on CNN. You hear the word "inflation" all the time. Now here, my definition as what inflation is: It's a persistent substantial rise in the general level of price related to an increase in the volume of money and results in the loss of currency value. If you are still with me, that may be the book definition, but to you it really just means that times can be tougher and your wallet is a bit tighter now than it was a year ago, 'cause things cost more. Our senior correspondent and inflation expert Allan Chernoff is here with more and he comes up with increasingly creative ways to explain to us, how inflation affects us, Allan.

Well, it's certainly we are getting squeezed, but it's much worse than what the government is telling us. The government is saying that the consumer price index has risen by four percent over the past 12 months. Well, let's have a look at some of the items that we buy very often in the grocery store. First of all, flour, over the past years, flour up by 14%, rice and pasta 13%, milk up 13% as well. The fact is when we go to the grocery store, we are paying increases that are much, much higher than the consumer price index is telling.

And then, why is it that the government number of four percent, and I, I, if I had hair I'd pull it out every time I see this number because the bottom line is we know that the things are costing us more, why does the number not reflect this?

The problem here the reason is that the way the consumer price index is calculated, these items that we buy almost everyday, flour, rice, they don't count for very much in this CPI. Let's have a look at some of these numbers. Flour accounts for less than one twentieth of one percent of the consumer price index. Rice and pasta one-tenths of one percent, milk three-tenths of one percent. It really doesn't add up to very much, in fact, food that we buy to bring into our own kitchens total accounts for less than 8% of the consumer price index.

When in reality we spend more on that than we do you've pointed this out, computers haven’t increased in price as much, or apparel. But we don't, we, when time is too tight , you gotta buy the food, it is disproportionate depending on who you are and what's your spending patterns are, there are other things that have gone up a lot more and that also doesn't help the calculation.

Totally, and this is very true for one area where we saw astronomical increases over the winter time. Fuel oil, people who have to heat their homes with fuel oil, the price for that for the past year up 48%, natural gas which is more prevalent, the increase was not quite as bad. Let's see how these are counted in the consumer price index if you look the percentage of the consumer price index, you see fuel oil where we had a huge increase accounts for only two-tenths of one percent of the CPI, virtually nothing. Natural gas, because so many more people use it, accounts for one percent of the CPI. Five times that, yeah. Yes, but the increase for natural gas as we saw was far lower than for fuel oil. That's why some people really feel the squeeze of inflation, others not quite as bad.

Here in the northeast, for instance, we use fuel oil a lot for our heating in parts of the mid-west, other parts of the country the primary heating source for heating air-conditioning is natural gas. So it's a different effect it has on your budget.

A really good topic! Thank you, Allan, for staying on top of that for us.