2/8/2020
Inflation is the increase of goods or services over time. But why do goods increase in price, or why don't they increase more? Is inflation a measure of the goods and services increased price or the change in the value of the exchange medium? If the exchange medium had a fixed price, would inflation still exist? Do barter economies have inflation? If the value of the exchange medium is changing, how do you track a twenty-dollar gold coin that is and will remain $20, and nearly an ounce of gold?
While it is the job of the Fed to manage inflation, as one of their dual mandates, I've noticed selective reporting in the measurements the Fed uses to serve this mission. For example, why is the U3 Unemployment rate the value that is most often discussed in official reports, political conversations, and journalism/commentary? I don't know the answer to that. But if you want to understand what's actually occurring in the economy the U6 is much more informative as it includes the discouraged, underemployed, and unemployed. If a Nuclear physicist is working at McDonalds then U3 counts them as fully employed while the U6 does not. Why can't a Nuclear physicist get paid for doing Nuclear physics? Unclear, but if a lot of people are underemployed that's probably a systemic issue.
Which brings me to inflation, the increase of goods and services over time. The TLDR is that I'm trying to figure out the changing value of the exchange medium (henceforth "coin(s)") using the changing value of goods and services. So I started to build a spreadsheet and picked out a dozen or so basic products and services starting with Big Macs and Whoppers. However, the burgers of the 1960s are not the same as the burgers in the 1980s. If the widget is changing, how can you price the coin? It occurred to me that with a large enough sample of widgets, doohickies, and gizmos and effectively summing all their prices over time and then subtracting the previous year's sum of all prices what you would be left with would be very close to the change in the value of the coin itself. It doesn't matter if the change in the coin's value is changing because gold has become more plentiful, an increase in foreign investment or the central bank is stamping more coins. The key is the value of the coin is changing and what the real value of the coin is. Last year it might have been worth one of itself but this year, relatively, it's worth 95% of itself.
While I was filling in my chart, I found that the Bureau of Labor statistics had a lot of the data I was looking for. The very cretins I was suspicious of. However, I quickly realized that not only did they have most of the data I was interested in, but they were also analyzing precisely what I had determined would be appropriate. What's more they were also taking into account how much more chicken people buy when the price of beef spikes for inconsequential reasons. So the BLS's methodology was more precise at determining the relative value of coins. But why is it that the "Core CPI" is reported and not the "All items CPI"? "All items" (henceforth aCPI) is good enough for social security cost of living adjustments and federal income tax brackets, why isn't it good enough for all us in every report? Well, the rate of change for energy and healthcare are changing faster than all other goods, so BLS leaves those outliers - out. But if one coin heats your house for an hour or buys a whole broiler chicken, isn't that relevant to the value of your coin? Of course. Might it be a reason to deduct it if all other goods and services are together changing at a slightly different rate? Of course - if you're interested in the change in nominal cost of those goods and services and not the value of the coin. If the heat and the chicken are the same, it's probably the coin that changed. The BLS removed energy from the Core in response to the Oil embargo ~1973 and it had previously separated out food in 1957 for similar reasons. Sounds political to me, I'm only interested in the relative value of coins not the value of coins in all areas except energy, healthcare, or food. I need energy, healthcare, and food. We all need the very things that were removed for price spikes. We can only get them with coins. Removing them from the index before reporting is like removing Apple from the S&P500 because it's 5% of that index and is more volatile. Very useful when talking about everything that isn't AAPL, but hardly useful when talking about the S&P500s rate of change (because AAPL is part of it).
Goods change in price for a myriad of reasons. You got your famine & pestilence, your strikes, your catastrophic airplane design problems, your embargoes, your tech boom, your being bombed into the stone age. The core question is, did the value of the coin change or did the value we place on the good or service change? Probably both, maybe for the same reasons. When you have no food, water, or electricity, you'll pay a lot more coins for them even if you usually take them for granted and they were formerly cheap. But why don't they increase more? Quite simply because of supply and demand and, to a real extent, transactability. Transactability is an implicit part of the value of coins, but impacted by many factors beyond the scope of this article but discussed in my primer on Cryptocurrency and primer on Fiat currency. But at the end of the day, if your dollar is quite literally not worth the paper it's printed on (so much harder to read off with all that green dye and doodles) then who cares? If it isn't the same medium of exchange it once was, it can become effectively worthless.
The nominal cost of goods and services goes up and goes down. The inherent value of coins goes up, goes down, and may be more or less transactable over time. Everything is changing. All the time. It is no simple thing to know the value of a dollar because the more you drill down into it the more details you find. Deep, deep, deep into the hole you've dug yourself, we can throw you a lifeline "Words mean whatever we say they mean. Unless we mean something different than what we say."
Ah, there's your golden idea.
Considering what we know, did they mean something different than what they actually said? Is what we thought they said, what they actually mean?
P.S.
If the exchange medium had a fixed price, would inflation still exist? (Yes; in cases of transactability, fundamental value changes, systemic disruption, and outside influence coins values change as it becomes part of the larger market including alternate exchange mediums. Also, prices can't actually be fixed because of the fundamental nature of transaction, no matter what a gold bug tells you.)
Do barter economies have inflation? (Yes.)
If the value of the exchange medium is changing, how do you track a twenty-dollar gold coin that is and will remain $20, and nearly an ounce of gold? (The aCPI. Also, about $1,300 at the time of writing.)
While it is the job of the Fed to manage inflation, as one of their dual mandates, I've noticed selective reporting in the measurements the Fed uses to serve this mission. For example, why is the U3 Unemployment rate the value that is most often discussed in official reports, political conversations, and journalism/commentary? I don't know the answer to that. But if you want to understand what's actually occurring in the economy the U6 is much more informative as it includes the discouraged, underemployed, and unemployed. If a Nuclear physicist is working at McDonalds then U3 counts them as fully employed while the U6 does not. Why can't a Nuclear physicist get paid for doing Nuclear physics? Unclear, but if a lot of people are underemployed that's probably a systemic issue.
Which brings me to inflation, the increase of goods and services over time. The TLDR is that I'm trying to figure out the changing value of the exchange medium (henceforth "coin(s)") using the changing value of goods and services. So I started to build a spreadsheet and picked out a dozen or so basic products and services starting with Big Macs and Whoppers. However, the burgers of the 1960s are not the same as the burgers in the 1980s. If the widget is changing, how can you price the coin? It occurred to me that with a large enough sample of widgets, doohickies, and gizmos and effectively summing all their prices over time and then subtracting the previous year's sum of all prices what you would be left with would be very close to the change in the value of the coin itself. It doesn't matter if the change in the coin's value is changing because gold has become more plentiful, an increase in foreign investment or the central bank is stamping more coins. The key is the value of the coin is changing and what the real value of the coin is. Last year it might have been worth one of itself but this year, relatively, it's worth 95% of itself.
While I was filling in my chart, I found that the Bureau of Labor statistics had a lot of the data I was looking for. The very cretins I was suspicious of. However, I quickly realized that not only did they have most of the data I was interested in, but they were also analyzing precisely what I had determined would be appropriate. What's more they were also taking into account how much more chicken people buy when the price of beef spikes for inconsequential reasons. So the BLS's methodology was more precise at determining the relative value of coins. But why is it that the "Core CPI" is reported and not the "All items CPI"? "All items" (henceforth aCPI) is good enough for social security cost of living adjustments and federal income tax brackets, why isn't it good enough for all us in every report? Well, the rate of change for energy and healthcare are changing faster than all other goods, so BLS leaves those outliers - out. But if one coin heats your house for an hour or buys a whole broiler chicken, isn't that relevant to the value of your coin? Of course. Might it be a reason to deduct it if all other goods and services are together changing at a slightly different rate? Of course - if you're interested in the change in nominal cost of those goods and services and not the value of the coin. If the heat and the chicken are the same, it's probably the coin that changed. The BLS removed energy from the Core in response to the Oil embargo ~1973 and it had previously separated out food in 1957 for similar reasons. Sounds political to me, I'm only interested in the relative value of coins not the value of coins in all areas except energy, healthcare, or food. I need energy, healthcare, and food. We all need the very things that were removed for price spikes. We can only get them with coins. Removing them from the index before reporting is like removing Apple from the S&P500 because it's 5% of that index and is more volatile. Very useful when talking about everything that isn't AAPL, but hardly useful when talking about the S&P500s rate of change (because AAPL is part of it).
Goods change in price for a myriad of reasons. You got your famine & pestilence, your strikes, your catastrophic airplane design problems, your embargoes, your tech boom, your being bombed into the stone age. The core question is, did the value of the coin change or did the value we place on the good or service change? Probably both, maybe for the same reasons. When you have no food, water, or electricity, you'll pay a lot more coins for them even if you usually take them for granted and they were formerly cheap. But why don't they increase more? Quite simply because of supply and demand and, to a real extent, transactability. Transactability is an implicit part of the value of coins, but impacted by many factors beyond the scope of this article but discussed in my primer on Cryptocurrency and primer on Fiat currency. But at the end of the day, if your dollar is quite literally not worth the paper it's printed on (so much harder to read off with all that green dye and doodles) then who cares? If it isn't the same medium of exchange it once was, it can become effectively worthless.
The nominal cost of goods and services goes up and goes down. The inherent value of coins goes up, goes down, and may be more or less transactable over time. Everything is changing. All the time. It is no simple thing to know the value of a dollar because the more you drill down into it the more details you find. Deep, deep, deep into the hole you've dug yourself, we can throw you a lifeline "Words mean whatever we say they mean. Unless we mean something different than what we say."
Ah, there's your golden idea.
Considering what we know, did they mean something different than what they actually said? Is what we thought they said, what they actually mean?
P.S.
If the exchange medium had a fixed price, would inflation still exist? (Yes; in cases of transactability, fundamental value changes, systemic disruption, and outside influence coins values change as it becomes part of the larger market including alternate exchange mediums. Also, prices can't actually be fixed because of the fundamental nature of transaction, no matter what a gold bug tells you.)
Do barter economies have inflation? (Yes.)
If the value of the exchange medium is changing, how do you track a twenty-dollar gold coin that is and will remain $20, and nearly an ounce of gold? (The aCPI. Also, about $1,300 at the time of writing.)
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