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Estimating true inflation
We know that the government estimates dollar inflation with it’s consumer price index. Many have criticized the CPI, and we know it “cheats” in favor of estimating low inflation.
Michael Saylor once pointed out that inflation depends on what commodity or stock you have in mind. The price of American cheese is pretty stable (2% inflation). As Saifedean points out, this is because nobody wants it, particularly. By comparison, stocks go up 15% per year compared to the dollar. The stock’s ‘true value’ doesn’t actually go up that much, but rather the dollar value is going down. So for stocks, the inflation rate is around 15%.
Would it be possible to re-invent the inflation index to be more accurate? Could we compute a a better inflation estimate by averaging the inflation rate of American cheese (2%) with the inflation rate of stocks (15%)?
I’m trying to imagine how we would do this. Cheese is a consumable good, so its “weight” would be how much money people spend on cheese each year. Real estate does not go away over time, so maybe its “weight” is the total value of all real estate in America. But these two quantities (money spent on cheese, price of real estate) are not of the same kind — one is like measuring the flow of a river (gallons per minute), and the other is like measuring the total amount of water in the entire river (gallons). How do you average two measures with different units: water flow and water amount, or cheese and real estate?
I can’t think of a good way to do this averaging.
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2 Replies
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Stocks vs real estate: Sorry for the inconsistency, just replace “stocks” with “real estate” everywhere it appears.
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This is the problem inherent in inflation and why it’s so easy for the state to obfuscate. Even if there were a way to reconcile these two different units, you’re still negating the affect that technological advances may be making. In an advancing society with hard money, the cost of a good like cheese should be decreasing over time as the division of labor and technological advances make it cheaper to produce.
So what’s the baseline? Certainly not 0%. Not over a long period of time at least.
Further complicating your effort is the fact that living in an inflationary environment affects all future human action, meaning that we will seek out ways to protect our wealth from the deleterious effects of inflation. This increases speculation and the ‘appreciation’ we see (in certain assets) as a result is not due solely to inflation.
The market is so distorted by the effects of fiat inflationary practices, that trying to derive the true affect of these distortions by the very thing that these practices distort is a losing battle. Better to just look at the total money supply to estimate the true inflation rate.
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