Price Indexes Aren’t Accurate Procedures of Inflation

While economists and journalists are fond of saying inflation is “X” percent, in fact, the price indexes don’t calculate inflation accurately

“ Inflation” is back in the headlines, and a lot of nonsense is being said about it.

Without much thought regardless of whether it makes sense or not, “ inflation” is defined as a general rise in costs. Official statistics claim that the particular “ price level” could be measured and its change computed as the so-called inflation rate,   there being almost no critical evaluation of the reliability of these numbers. Rarely could it be mentioned that these concepts are statistical constructs, published because “ official numbers” and therefore, subject to  government   interests.

Prices

The fundamental problem with the calculation of the price level is the assumption that money would measure the associated with goods. This approach confounds value with exchange ratios. Money prices do not reflect the significance of a good and therefore they do not measure anything. Consequently, it also makes no sense to talk about a “ price level. ”   Based on   Ludwig von Mises:

When people talk of a “ price level, ” they have in mind the image of a degree of a liquid which goes up or down according to the enhance or decrease in its volume, but which, like a water in a tank, always goes up evenly. But with prices, there is absolutely no such thing as a “ level. ” Prices never change to the same degree at the same time. There are always prices which are changing more rapidly, rising or even falling more rapidly than other prices.

Prices are different from  value . Prices just make sense as price relations, as relative prices. As a result, they serve the performing man as an orientation about the prevailing market conditions. Costs answer the question of which services and goods cost more  and which alternatives cost less on the market compared to other goods. As such, prices are a market phenomenon, growing as  exchange proportions ,   and cannot arise meaningfully outside of marketplaces.

Relative prices indicate the prevailing situations of relative scarcity. The price ratio is inversely proportional to the exchange ratios. For example , if one unit great A exchanges for two models of good B, A expenses twice as much as B in terms of the respective monetary devices. As is obvious with the overall number of price tags in different currencies, the price figure itself can be irrelevant and only makes  sense as a ratio to other costs.

Money is a medium of trade. The use of money makes it possible to prevent the need for a “ dual coincidence of desires” of exchanges in kind, and thus,   money   itself is a market phenomenon. Money serves as the overall medium of exchange. Will not measure anything. Likewise, prices only make sense as ratios. Because both the scale as well as the measuring object are susceptible to change, measurement is not achievable.

The obsession with the “ price level” has done much harm to the conduct of monetary plan. Most modern central banks exercise so-called  inflation focusing on   without being completely aware that the inflation rate as their indicator is a chimera. By following this concept, main banks ignore that their own guidepost is a phantom plus that the idea that the price level should rise steadily itself  makes no economic sense. In the perspective of the financial theory of the Austrian college, the consternation of the financial policy makers in the face of their  repeated failure   is neither a surprise nor historically new. The state inflation rate misleads the central bankers as well as the monetary market operators.  

Price Reviews

As the price ratios are a particular reality for the individual economic subject and guide the person on which choice to make, this particular cannot be said of the so-called price level.   The “ inflation price ” published with the statistical offices is said to show how the so-called price level  has changed over time. Yet what is this level supposed to represent? As opposed to relative prices, which  can be observed, a price index does not exist in the economy other than as a fabricated statistic.

The so-called price level is a highly problematic idea. Its calculation requires like a first step a criterion for which goods to include and which goods to leave out of consideration. In the real economy, there are so many different and differentiated products that it is impossible to include all of them in a consultant market basket. Some items are bought daily; some other goods only a few times  inside a lifetime. Furthermore, there are items that are substituted  by other goods over time and then disappear from the market or eliminate their importance.

Every household, every person, and every region has a specific intake pattern. Even if all buildings were of the same type, they would be different because of their area and would therefore have very different prices. Even when considering such a simple good as an  egg , a closer look discloses that much more than size plus color distinguishes them.

In the modern economy, additionally , new products come onto the market again and again. Some of them are just mild modifications of existing products, but others are distinctively new. How is it achievable to compare the price average  from period to the next? How can one claims to know that the price level has risen or fallen when the statistical  market basket   that serves as the scale  is  itself  subject to changes?

How does one determine high quality changes? The floodgates are open to manipulation when it is up to the statistical authorities to determine the amount that such perceived quality changes would represent, since happens with the so-called  hedonic inflation calculation . According to this  method , an assumed “ quality improvement” is subtracted from the price, especially for specialized products. These goods therefore enter the basket at a lower price than they cost on the market. This procedure lowers the record inflation rate and produces up the figure for the growth rate.

Set up choice regarding the selection of services and products to be included in the shopping list might be fully perfected, which is not possible, the problem of how to collect the price quotes follows. Where, whenever, and how frequently will the cost observers visit the shops and the marketplaces to register the prices? A lot of products have different prices at different locations with different times. The same flight has different prices based on when the ticket is bought. Hotels charge higher rates for the same room and company in the high season than in the low season.  

Purchasing Strength

The cost index is a statistical illusion based on the chimera of a set basket of goods as a device of measurement. There is no scientific method of measuring the price level. Can the owner of a house call himself richer when the index of the house prices rises? For any person who lives in his own house and has no plans to market, neither the housing costs nor the height from the rents is of importance. The situation is similar with the stock market. Has the nation become richer when the stock market index has risen?

There is no this kind of thing as the price level for the whole  economy or maybe the overall wealth of a culture. Every person, every family, every region has a different cost structure. Everyone has his own variations of the purchasing power associated with his money. What you can do is count the expenses of one’s own shopping cart plus calculate its costs compared to one’s income. Such a calculation shows whether the individual purchasing power has risen or even fallen. To do this for an entire economy makes no sense. It is as futile a procedure as the common  practice   of calculating the overall economic wealth simply by summing up the prices to get property, bonds, and stocks and shares and claiming that this signifies national wealth.

Ludwig von Mises  criticized   the techniques of such macroeconomic calculations a long time ago when he published:

Most methods suggested for a measurement of the changes in the monetary unit’s purchasing power are more or less unwittingly founded on the illusory image of an endless and immutable being which determines by the application of a good immutable standard the quantity of satisfaction which a unit of money conveys to him. This is a poor justification of this ill-thought idea that what is wanted is just to measure changes in the purchasing power of money. The crux of the stability notion lies precisely in  this   concept of purchasing power.

Only pseudoscales are available like a general evaluation. The assessment of the benefits of a product is usually subjective, individual. The value of a good depends on the personal assessment of the changing circumstances. According to this particular subjective evaluation, the individual will make his choice according to the relatives price changes.

Conclusion

Macroeconomic economic data are constructs. With the “ inflation measurement, ”   both the price as the object of measurement and the market basket as the measuring rod undergo changes. Without a constant scale, no measurement is achievable. What can be measured properly is the money supply. Its change is the right use of the concept of “ inflation” and the “ inflation rate. ”   Yet what appears to be an objective standard of dimension in price statistics is the problematic effort to measure the unmeasurable. The numbers that obtain published as official inflation figures are very crude indications at best. Taking these quantities at face value is definitely naï ve and dangerous.  

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