Any attempt to represent the universe with symbols and numbers alone runs into an obvious challenge: it is impossible to construct almost everything but a perfect abstract.
But we can create models that are good enough to analyze our world. We can find interesting interrelationships, and occasionally find causality and develop a better understanding of the ways in which different variables communicate. We can even create toolsets that provide insights into the near future based on the recent past.
That’s what led British statistician George EP Box to announce. “All models are wrong, but some are usefulBox realized that models do not have to be perfect to serve as useful tools. The team of analysts, economists and portfolio managers who use them agree.
I have been a critic of the CPI for a long time, and why is it important to understand?Wrong“Part, it’s just as important as understanding.”Useful“Part, too.
There is a world of confusion in the gap between objective reality and their illustrated models: this is where the conspiracy theory is born, where the old-fashioned ideologues live and where the charlatans thrive.
We have discussed how the official CPI basket of products often devalues inflation. It was purposefully targeted by the 1995 Boskin Commission, accusing the Bureau of Labor Statistics of revising the inflation measure. It was a dishonest, biased way to reduce inflation readings to reduce the cost of living adjustment (COLA) for social security and other government spending.
My favorite example is “replacement” – the idea that if the price of beef goes up, people will move to less expensive chicken. The reality is that inflation has pushed consumers up the price of steak; Alternatives tell us about behavior, not inflation. We have also jumped into the OER and why sometimes, housing inflation can be a challenge for modeling.
And yet, for all its flaws, the CPI does a pretty good job of measuring inflation. Just look at the Massachusetts Institute of Technology’s Billion Price Project (BPP), which monitors the daily value of ~ 15 million items sold by +1000 online retailers in more than 70 countries. It runs fairly parallel to the CPI, as seen in the three charts (above).
The challenge today is to gradually shift from a pre-epidemic pre-epidemic service (63%) economy to a mix of normalization of both products and services.
In the epidemic era, we probably Pulled forward Much better shopping from 2022-24 to 2020-21. This may be one of the reasons why some retailers are reporting lower earnings. (More on this soon)
In the meantime, inflation has probably peaked and will probably continue to decline for the rest of the year. The key issue is how long Russia’s war in Ukraine will last.
Why has the calculation of inflation changed over time? (NYT, May 24, 2022)
Where is inflation going? Nine Signs to See (WSJ, May 24, 2022)
Transit taking longer than expected (February 10, 2022)
Inflation, punctuated by inflation spam (June 11, 2021)
What Models Don’t Know (May 6, 2020)
Inflation is not a problem (still) (June 25, 2018)
Confession of Inflation Truth (July 21, 2014)
Is inflation really understood? (No!) (May 08, 2008)
E.g.– Inflation, no inflation (September 26, 2005)
How Housing Reduces CPI (May 21, 2005)
Have fun with Hadonics or: “How I learned to stop thinking about CPI and inflation.” (April 21, 2004)
No, your iPhone doesn’t make you rich (June 4, 2018)