When consumers engage in substitution, they are explicitly acknowledging inflation. Only the starry eyed residents of ivory towers can say with a straight face that cheaper substitutes are non-inflationary. When a product's price rises out of a consumer's ability to afford purchasing it, it's prima facie evidence of inflation. Indeed, substitution is PROOF of inflation. The substitution process fraudulently rationalizes this to eliminate inflation from the BLS basket. When someone buys chicken instead of steak because meat has gone up in price, that's evidence of inflation. However, it's another thing entirely to pervert this behavior and offer it as proof of less inflation. It's one thing to try to understand consumer behavior in the context of the real world: In the real world of finite budgets and price sensitive consumers, substitution is an actual consumer behavior. See for example An Expert System for Reviewing Commodity Substitutions in the Consumer Price Index, or the Testimony of Fed Governor Edward Gramlich on Improving the consumer price index. Substitutions: There have been numerous academic approaches to this subject. Let's take a closer look at two of my favorite inflation data absurdities, Substitutions and Hedonics: and UK inflation data in " The Sordid Truth About Inflation." By the time the UK inflation arrives here, it's so tired by its swim across the pond that it can't move the BLS needle at all. We discussed a few of the differences last week between U.S. A variation on Core Inflation is Wall Street's love affair with Inflation -ex-inflation, which is a basket of only those goods and services that have not gone up in price.įinally, the latest inflation innovation is a new concept I call Uni-directional Inflation, which states that when certain items (e.g., Oil, Corn, Copper) go up in price, it is not inflationary - but when those same items drop in price, it's proof positive that inflation has been vanquished. Then, we have the Fed's focus on core inflation, which tends to ignore the non core items like Food and Energy (besides, who really needs Food and Energy anyway?). Next, add a sprinkle of substitutions, quality improvements, and hedonic adjustments, all of which rationalize price increases as somehow non-inflationary. Start with the inherent bias built into the BLS models, and their tendency to understate inflation. Let's take a closer look at some of the specifics: I have long railed against many of the absurdities associated with modern Inflation reporting.
0 kommentar(er)
