General Price Level

Promoted from Colonel Price Level.

Ever wonder how economists talk about the prices of certain things going up or down when those prices are different everywhere? It’s hard to talk macroeconomics without aggregating stuff into hypothetical “baskets,” which is what these economists are doing. It’s taking a big ol' average. So they’re talking in hypotheticals and averages more than about any one specific product or service.

The general price level of groceries? It’s the price of your groceries on average, but also of everyone else’s around the country, all in one basket. The price of college? Yep, a heavier basket than it was in the ‘70s. Baskets galore make measures like the “general price level” possible for macroeconomics to talk about.

Economists use these baskets to compare the prices of goods over time. Everything is relative.

So consider another view, laden with examplage. You go to the store to buy your usual weekly stables: canned chili, caramel-dipped frozen bananas, pickled kiwi rinds, and replacement enema tubes. Every week, you buy the same things. Week in, week out...your grocery cart has the same four items.

It's been like this for years. Same stuff, every week. You're a creature of habit. You also have some potential digestive problems you might want to check out, but...that's another story. Over time, prices for the individual items move in all different directions. Prices for some of the items might go up, while prices for others might go down.

Even when everything moves in the same direction, the prices don't change at the same rate. Some see big jumps in price. Some prices barely move at all. For instance...in the past year, the price of a can of chili rose from $1.46 to $1.49. An increase of about 2%...not a big deal.

However, pickled kiwi rinds have jumped to $7.69 from $7.09. An increase of nearly 8.5%. Much bigger deal. Meanwhile, the price of enema tubes actually fell during the year, leaking...er, dipping... to $6.49 from $6.74.

Those are individual price levels. But what about the general price level? The general price level is a measure of prices across an entire system. Not just the direction of a price. The direction of all prices.

So, this week, all the items in your grocery cart cost you $20.02. That's your general price level. If you want to make an economic indicator out of it, call it your personal general price indicator, or PGPI.

Once you know the general price level, you can track overall price changes over time. So, a year ago, the four items that you buy every week totaled $19.42. This year: $20.02. Your PGPI rose 3.1% from last year.

In real life, these general price levels are used to track inflation...or deflation, though it doesn't happen all that often. People like to rattle off inflation stats, but it's actually a tricky thing to track. In a complex economy, prices for various products are moving in different directions and at different rates all the time. Combining all this action into a single stat can become extremely complicated.

Lots of competing indicators measure the general price levels in the overall economy. The most high-profile of these is the consumer price index, or CPI. It works like the total prices for your weekly grocery basket...except that the CPI includes a big basket. A basket with a representative sample off all the stuff people buy.

Your personal consumer price index may include just those four items you buy every week. You know, the basket where 1 in 4 items are enema tubes. But the CPI index is a lot broader...thousands of items that people buy all the time. So, yeah...enema tube prices make up, uh...far less than 25% of that index.