Here’s the biggest thing everyone gets wrong about inflation

ReutersA hot air balloon in the shape of Darth Vader flies with others during the Hot Air Balloons Festival in Leon, Mexico, November 16, 2009.

It’s easy to make the joke that every time a product you buy regularly increases the price that’s inflation.

Your favorite restaurant jacks up the price of your go-to order? That’s “inflation.”

Gas price drops by 16 cents at the local pump? “Deflation.”

Loaf of bread goes up by a dollar at the grocery store? “Inflation.”

Here’s the thing, your joke is kind of true, but mostly wrong.

“Inflation numbers are an aggregate, but it’s easy for people to notice the things that impact them most,” said Kathy Jones, chief fixed income strategist at Charles Schwab.

Now inflation has been stubbornly low for some time, everyone from the Federal Reserve to President Obama’s budget projections but to average Americans, it can seem much worse.

Jones said that clients come to her talking about rising inflation cite the increased cost of healthcare or rent or Cheerios, in essence the things that are most noticeable to them.

“They notice what they notice because it is most likely the items they buy regularly, that they have to look at the price tag constantly,” said Jones.

Measures such as CPI, however, include more than just everyday goods. Items such as televisions, computer software, and funeral services are also included in the measure and are less noticeable.

Not only do clients focus on what’s at hand, said Jones, but there is also a bias towards the bad news of increasing costs. It’s more painful to watch prices go up, so a consumer is more likely to notice when that occurs.

And finally, most people don’t take into account the trade-offs that the data can measure. For instance, said Jones, if you are a dedicated buyer of Tropicana orange juice and the price rises, you assume inflation is increasing. The data measure, however, is broad enough that even if one brand goes up the orange juice category may not rise in aggregate.

Add all of this up and it’s easy to get the image that inflation is much different than it is.