Can you measure inflation pain? Probably not, but I have an interesting chart (click):


The green line is the consumer price index, which is measuring the price of the basket of the average consumer (your mileage will vary as, for example, I spend 2% of my income on gasoline, but some people spend 15%). This measure compares apples to apples, i.e. the basket is more or less the same.

The red line is chained consumer price index, which is using PCE-adjusted basket, i.e. is comparing apples to oranges. How? For example, if price of the oranges is growing too fast comparing to the price of apples, many consumers are switching from oranges to apples, so the weight of oranges in the index is declining.

The red line is always below green one, which is quite natural – people are switching between apples and oranges to minimize the impact of the inflation. But what is interesting is the delta between those line – I think this is a simplest proxy to measure the inflation pain. When people don’t care much that the price of oranges is growing they don’t switch to apples and the lines are close. But when they just can’t stand the pain of expensive oranges and are running into safety of apples the lines are falling apart.

It seems that inflation pain was especially big in late 2000, then it was better and then the pain was back in most of ’06, then we had a mid-cycle slowdown in late ’06 – early ’07 and then the pain reached the 6-year maximum in late ’07 and is at maximum now.

The inflation pain is a negative feedback loop – when consumers are able to boycott the most expensive items (we know that many department stores are losing customers to Walmart and I heard that Walmart is planning for quick colonoscopy exams right at the checkout, taking customers away from expensive doctors) the pricing power is fading.

Please note that the periods of maximum pain are always followed by the decline of absolute inflation numbers