Flaw of Averages: 3 views on inflation …

Oftentimes, important trends are buried  in statistical averages.

You know, the thing drowning in a river with an average depth of 3 feet.

In my Strategic Business Analytics course, I harp on “decomposing” problems and statistics down to their component parts …. to simplify the problems and reveal insights.

Here’s a case in point: the Consumer Price Index (CPI).

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For the past 10 years (really, longer), the CPI has pretty much straight-lined upward.

Case closed, steady inflation … right?

Not so fast.

Let’s look at the CPI from a couple of other angles …

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First, let’s look at the percentage change in the CPI from one year to the next.

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Yeah, there has been constant inflation, but there has been a steadily decreasing rate of change … with the most recent indications of deflation.

Hmmm.

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A 3rd view  provides even more meaningful insights.

The CPI is composed of a basket of goods and services … prices have been going up on some items … down on others.

While things like electronics and cell phone service have been coming down …  a few components — think, healthcare and college tuitions — have been sky-rocketing … skewing the overall CPI averages.

 

image

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Bottom line: decompose everything … problems – to simplify them … and data – to uncover meaningful insights.

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Thanks to SMH for feeding the lead.

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#HomaFiles

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