Hiding behind the CPI drama, again!
Changes in the CPI calculation method further taint this measure and hide hypocrisies of the people incharge
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When a measure becomes a target, it ceases to be a good measure. Goodhartâs law summed it up great and the US Bureau of Labor Statistics has left no stone unturned in making the public realize how faulty this measure is getting. Our mentor from The Informationist sums it up greatly in his thread. Letâs dive deeper.
The CPI is basically the measure of inflation used by the US Bureau of Labor and Statistics (BLS) to calculate GDP and nominal rates. It is the nationally accepted value that the dollar erodes in value each year, i.e. the yearly inflation value. It has long since been ideal for which monetary policy decisions are made by the FED, although the FED likes its cousin more, the PPI. In essence, it is a measure that has great economic implications and is vital to determining many outlooks. So, transparency and accountability must be at the highest degree when reporting it, right?
Well, that cannot be said with certainty. The CPI has been rigged multiple times and the value just fails to depict reality. From simple daily consumer items to large commodities, price increases have been off the roof but the CPI shows a humble value of only 6% as of February 2023. And here we are crying over the increased home prices, fuel costs, and prices of everyday goods, even eggs have turned golden. Hence, it will be modest to say that the CPI is undervalued. It has no idea of reality.
The CPI consists of a basket of goods from which the price increase is measured over a specific time frame. Like the NASDAQ or S&P measuring the price changes of the stocks it consists of, the CPI works on a similar mechanism. These goods include as stated by the BLS:
BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups (food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services)
So, most things are covered and we get a birdâs eye view of our living conditions. Well, not so fast. Well, the problem is that when such a measure is in the hands of a few individuals sitting in high corporate organizations which function keeping in view the interest of a selected group of individuals then it is for sure that the measure will be influenced by many things rather than the natural forces of supply and demand.
The BLS now cares more about how you live
The CPI has been used to measure the cost of goods since its inception ie. a fixed set of goods that determine its value. However, in modern times, it has been changed to measure the cost of living. That is, now the BLS is more interested in how you spend your life. Now the âfixedâ basket of goods is no more and it is the Cost of Living Index (CLI) that matters. If people tend to prefer one item over the other, the item bought more will be included rather than the one less in demand.
At first thought, this sounds like a good idea but what it sows is a seed for manipulation. When the basket of goods is not fixed, anyone (well, the authorities in charge) can add or subtract goods to make the number look good. Hence this is a dilemma for the present citizens on how to protect themselves from inflation as well as gain in real rates to offset the fabricated inflation. If the dollar erodes in value more than the 6% touted then your wealth must be protected at a higher rate of return.
The same drama, just an upgraded stage
Starting from January this year, the CPI will represent data for a single calendar year rather than 2 years which has been the previous norm. Although this allows for a more stable value by constraining the data, eventually it leads to an inaccurate reading. Havenât the officials at such high posts responsible for bestowing upon us their economic wisdom know this simple rule of data collection that is taught in maybe primary schools that the more data you have the more accurate the reading? Well, there goes logic in the trash can.
According to the BLS, this method allows for a clear depiction of peopleâs spending. Well, you just disappointed a lot of people. It is like the government wants to erase its previous mistakes by sweeping all the dust under the carpet. No more data, no more worries. Kick the can down the road until no one notices.
And voila, we have a new metric that is great on paper. The inflation numbers for this year are less than for this year than the previous one. Job well done, or is it?
Insightful takes:
When not every individual is responsible for the effect he has on the natural resources, then an unsustainable economy arises. Power is constricted in a few hands and they decide the rules in which everyone operates.
All problems root in a crippled monetary system. If the money does not represent the natural resources without inflation, it is useless.
The government needs inflation as the large amount of debt that has been piling up needs to be serviced. It just has to show the public that is working on getting it down rather than actually doing something.
Higher inflation bloats the corporate earnings and prices which leads to more money collected a taxes, another reason for the higher inflation.
When an economy shows increased activity, deflation happens, and for the opposite inflation happens. In our present system, deflation is unheard of and inflation is rampant. It shows one thing, a non-disciplined monetary base.
Bitcoin is hard money that represents resources spent to create economic value. It is controlled by math and code and reigns supreme. Well, if it is able to capture its rightful throne.
Hope you liked my insights.