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PaperclipPerfector  2mo ago (text post)   2904 thread views

Small-Scale Question Sunday for September 15, 2024

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

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One imo true part is inflation stats. Basically, we used to use a simple bucket-of-goods based approach, which would compare the same goods in the past to the same goods in the future and calculate inflation based on that. This was deemed not good enough, on the understandable logic that we will want different goods in the future, so over time this fixed bucket will reflect consumer realities less and less.

So we now use a different approach, the CPI, which has a flexible bucket based on the actual goods we buy instead. Sounds good? Well, the problem is twofold. First, it means we aren't comparing like-for-like anymore, so any historic inflation comparison is kind of nonsensical. Second, and imo even worse, it naturally biases inflation estimates downward. For example, back under Corona bell pepper prices shot up 300% or so at my local super market for a while, and we pretty much instantly stopped buying them. Which means that over this time frame, looking at the CPI, the rather extreme inflation of bell pepper would have minimal to no impact on the inflation stats calculated solely on our household, despite being one of my favorite vegetables that I like to eat near-daily if I can. This can easily be generalized to most consumers - if there is a good that was consumed a lot in the past but not anymore, a solid % of that will be an increase in price, and vice-versa any good that was rarely consumed in the past but is now consumed a lot, chances are it got cheaper.

See here for a graph

So if we fully buy into this framing, some time in the 80's official eco stats substantially uncoupled from the real economy. Obviously that doesn't prove that we actually got poorer, though.

Interesting.

I’m used to thinking of inflation as a demand-side phenomenon. The Econ 101 explanation was something about money supply. More dollars in circulation, more thrown at any particular good.

It makes sense that a supply shock across a slice of the market would count as inflation, because people are substituting some kind of produce. What about an isolated shock? If it had somehow just been bell peppers, should it have counted as inflation?

I guess I’m saying the CPI isn’t necessarily wrong to bias downwards. A metric which didn’t account for substitutions would be a bit silly in its own ways.

I have to admit I strongly disagree on the basics of inflation, then. It is agreed that the price of any good is dependent on supply and demand. Inflation, being about the increase in price of everything, necessarily needs to be dependent on both supply and demand as well. Constraining the supply of everything will straightforwardly lead to a price increase of everything.

There are some examples in which ignoring substitutions entirely would be foolish, yes. But imo the CPI goes too far in the other direction.

No, no, we agree on the basics. It’s just not what I’m used to.

Ok so when did standard of living decline.

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