misLeading Indicators: How to reliably measure your business

Will anybody ever trust inflation measurements?

Posted on | April 30, 2011 | No Comments

About 200 years ago Joseph Lowe said that “the interest of government, the greatest of all debtors, [is] to prevent the public from fixing its attention on the gradual depreciation of money.”  It seems like the Argentinian government is doing its best to prove Lowe right. Recent reports (see here and here) suggest the Argentinian government is fiddling its inflation numbers. The  official number is 10%, private economists peg it closer to 25%.

Arguments about how to measure inflation have been going on for centuries. Between 1919 and 2003, the Bureau of Labor Statistics comprehensively updated the way it calculated the Consumer Price Index six times. It made smaller changes to its methods more regularly.

Bill Gross, who manages $1 trillion for PIMCO, said that ”CPI numbers [are] not reflecting reality at the checkout counter,” and talks about the “total fiction that is government reporting of inflation.” John Williams, an economist, publishes his own measure of inflation in the US, just like ecenominsts in Argentina. Hie measure pegs it about 7% higher than official numbers.

Econominsts at the Bureau of Labout Statistics say that “apparent in¬consistencies between the index and people’s perceptions” are based on “misconceptions and myths.”

The controversy could be easily resolved if there were some objective way to measure inflation that  could be calibrated, like you can calibrate a thermometer. But you can’t. In common usage, inflation is the Consumer Price Index-the thing we want to measure. At the same time, it is the instrument we use to measure it. The two are combined into one. The CPI is being constantly redefined to meet changing circumstances. It is as if both the definition of temperature, and the instruments we use to measure it, were in a constant state of flux–so there will  always be doubters.

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