#57 CPI is a Lie

Inflation is a term which has been co-opted to purport certain narratives. Today, when we think about the word inflation, as any trained economist would tell you, we are referring to the Consumer Price Inflation (or CPI) metric, which is a calculated basket of economic goods regularly purchased by consumers.

Notice that the cost of higher education and tax burdens are not accounted for in the CPI basket. Additionally, the sale price of housing is not the metric used here, rather it is the owner’s equivalent of primary residence (OER), which is the equivalent cost an owner would have to pay to live in their home if they were instead renting.

Immediately there are a few problems that come to mind when considering CPI and how it is measured. The most important one, in my opinion, is the great variety in preference of one individual versus another. What products and in what quantities you choose to buy at the grocery store might be vastly different from my own preferences. While you might decide its worth while for a large portion of your disposable income to go towards making a new car payment every month, I might choose to buy a used vehicle.

These comparisons can be extrapolated indefinitely. The value decisions made by individuals across a society are nearly limitless in their breadth and scope, and can often change quite rapidly even for a single person. The preferential value of a good cannot be estimated by an economist because every acting individual predisposed to their own preferences, despite the statistical sorcery of hedonic regression.

Thus, the relative purchasing power of an individual who prefers to buy more eggs than milk, would be more adversely affected in an environment where eggs become more expensive but milk remains the same. Two neighbors can both work in the same building and one may choose to walk to work and the other may choose to drive. Obviously, their transportation costs will vary dramatically.

Secondly, given what we know about the abundance of technology and the ways in which it enhances productivity and generally makes the cost of producing more goods and services go down, CPI does not adequately reflect the amount of inflation which must happen in order for the cost of goods and services to appreciate rather than depreciate. This net effect cannot be calculated by merely tracking the annual increase in a basket of goods because there is no way to accurately measure what effect deflation would have had if the money supply had remained constant or changed very little.

Thirdly, governments have changed the way CPI is calculated in the past. I understand this might be surprising, but when entitlements and salary adjustments are calculated by inflation rates, toying with the metric can prove to be a very effective method of cost cutting. Annual salary adjustments are not nearly as politically popular as special interest funds.

The Chapwood Index works to find a more accurate measure of the changes in consumer pricing of goods…but I would propose a much simpler alternative.

Inflation can be very simply measured by looking directly at the rate of which the money supply increases. While a dramatic increase in money supply might take time to affect every area of the markets equally, perhaps first moving its way into equity assets and later moving into consumer goods, this is certainly a much more accurate way of assessing the rate at which the total relative purchasing power of a currency is diminished. While the Fed no longer publishes the rate at which M3 expands, M2 should give us a fairly reasonable estimate in terms of the % change of our economic unit of account.


This conclusion would make a trained academic economist a bit red in the face, however, I believe it is very simple. If the economy were a pie, your aggregate wealth which is held in fiat currency represents a single slice. When you print more money, the pie does not get any larger as a result, your piece is simply made smaller to accommodate for a shift in the unit of account. What once represented 1/8th of the total pie, must now represent 1/16th.

Of course, as we know, the ways in which credit expansion and seniorage are deployed by the economic central planners often leads first and foremost to asset inflation, which even more so exacerbates the effects of this wealth redistribution scheme in a market economy.

Book of the Month:

The Price of Tomorrow: Why Deflation is the Key to an Abundant Future

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