Thursday, 3 April 2014

Imaginary Numbers, 2: Inflation

That figure you hear on the news reporting “inflation” – that thing called the Consumer Price Index – it’s really not anything like you think it is.

And as John Crudele explains, it’s getting worse:

The latest money-saving effort is something called a “chain weighted” measure. This is a version of something I’ve written about a lot — geometric weighting. In brief, it means that if something becomes too costly (like steak), then people won’t buy it. They’ll buy hamburger instead.
So even though steak prices are up, that increase won’t show up fully in the CPI. Therefore, the CPI no longer measures the cost of living — it measures the cost of surviving! April Fool’s!
Hedonics is another trick of the trade. Let’s say the price of cars goes up, which it does every year. But the full increase isn’t counted in the CPI because someone decided that the value the buyer is getting — a better radio, nicer paint job — has offset some of the cost increase.
And there’s the concept of “owner-occupied rent.” The rise in real-estate prices isn’t calculated in the CPI. Instead, there’s a formula that estimates what it would cost for you to rent your own home — and that’s the increase that goes into the CPI.
Who the hell can come up with a legit figure for something like that?!

Nonsense numbers based on nonsense reasoning, giving cover to central bankers peddling nonsense.

[Hat tip Vodka Pundit]

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