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In the 1970s and 1980s, Brazil suffered from two serious bouts of inflation. At one point, the government imposed mandatory monthly adjustments in most money wages in line with changes in the consumer price index (CPI). This was meant to assure that real wages did not significantly lag behind changes in the cost of living due to rising prices. As the situation deteriorated into a hyperinflation (prices in general rising at more than 50 percent each month), the Brazilian government argued that money wages were automatically rising at too fast a clip due to a small handful of commodities that were unreasonably pushing up the average monthly increase in prices as measured by the CPI. To reduce this “bias” they decided to eliminate these commodities from CPI basket of goods.
This noticeably reduced the measured rise in monthly price inflation, and therefore also resulted in lower monthly adjustments in workers’ money wages. Among these handful of commodities said to be unreasonably pushing up the CPI, however, were bread and milk. The government succeeded in creating the illusion that price inflation was less than it really was, but at the cost of keeping the mandatory adjustments in money wages significantly behind what a family needed just to feed their children and maintain their standard of living. Fortunately, we do not have the government mandating what prices and wages should be in the United States. But the government tries to play a similar trick with its distinction between “overall” inflation and “core” inflation. Overall inflation means the monthly changes in the Consumer Price Index, which is a composite “basket” containing all the general categories of goods and services consumed by an average, representative American family: food, housing, transportation, energy and fuels, recreation, apparel, medical care, education and communication, and a wide variety of other personal services. Core inflation refers to all of these goods, minus food and energy. It is argued that the prices in these two categories often change with greater and more frequent volatility than many other types of goods. Their inclusion in the CPI, the government says, exaggerates the rate of price inflation in the U.S. Hence, the government claims that by subtracting them out, we get a better picture of the inflationary trend in America. Food and beverages are estimated to represent 15.9 percent of all consumer purchases, while energy expenditures (including motor fuel and household uses) cost consumers around 11.6 percent of their financial outlays. These two categories, in other words, make up about 27.5 percent of the average American family’s monthly expenditures. The accompanying graph tracks overall and core price inflation for slightly over the last two years. While core inflation has remained between 2-3 percent throughout this period, overall inflation has fluctuated far more dramatically. But especially since August 2007 overall inflation has been rising monthly far above core inflation, until now it is increasing at a rate 60 percent faster than core inflation due to the dramatic increases in energy and food prices during this period. The government may believe that inflation is not a serious problem for the average American when measured by the “core.” But every individual American knows that price inflation is, in fact, far worse whenever they fill up their tank at the gas station, pay their own energy bills, or go through the checkout line at the supermarket. 
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