Monday, April 10, 2017

The Consumer Price Index: A False Indicator of Our Individual Costs-of-Living

Richard Ebeling emails:

Dear Bob,

I have a new article on the website of the Future of Freedom Foundation on, "The Consumer Price Index, a False Indicator of Our Individual Costs-of-Living."

The Federal Reserve and many other central banks have set monetary policy targets of annual two percent price inflation, as measured by such statistical aggregates as the Consumer Price Index. Yet, it should be recalled that overall price measurements such as the CPI are artificial creations of economic statisticians, and not something real that confronts consumers and businessmen in the marketplace of supply and demand.

These are price aggregates that hide from view the reality of the complex and interconnected structure of relative prices for consumer goods and factors of production, which are what influence and guide the actual choices and decisions of consumers and entrepreneurs.

Once we "disaggregate" the price data in the CPI, for example, and see the different ways that changes in multitudes of individual prices in terms of each other can modify what goods people buy and in which relative amounts, we understand that the world of possible price inflation or price deflation is not as simple and simplistic as the government's monthly CPI makes it appear.

Furthermore, the use of various types of aggregate price indexes to direct monetary policy by central banks also hides from view the way increases in the money supply actually bring about distortions and imbalances between savings and investment, how is capital used in production, and the allocation of labor among various employments, which sets in motion the ups and downs of the business cycle.


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