Comment by throw0101c | Hacker News Reader

Comment by throw0101c | Hacker News Reader

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> And if the prices for good B go down, and people buy more of it, then it will be weighted more in the calculation.

Yes? Of course? Up here in Canada, the CPI is adjusted from spending surveys:

* https://www.statcan.gc.ca/en/survey/household/3508

When people change their habits in life the CPI is changed to reflect what that life costs. You can see the list of changes going back to 1913:

* https://www.statcan.gc.ca/en/statistical-programs/document/2...

Do you think coal and lard should be included, like they were pre-1956? Or do you think the CPI should try to model reality?

> CPI is structurally biased to report lower inflation.

Quite the opposite. In the 1990s the Boskin Commission found that CPI was too high:

> The Boskin Commission, formally called the "Advisory Commission to Study the Consumer Price Index", was appointed by the United States Senate in 1995 to study possible bias in the computation of the Consumer Price Index (CPI), which is used to measure inflation in the United States. Its final report, titled "Toward A More Accurate Measure Of The Cost Of Living" and issued on December 4, 1996, concluded that the CPI overstated inflation by about 1.1 percentage points per year in 1996 and about 1.3 percentage points prior to 1996.

* https://en.wikipedia.org/wiki/Boskin_Commission

* https://www.ssa.gov/history/reports/boskinrpt.html

* https://www.stlouisfed.org/publications/regional-economist/j...

I don't think the calculation/definition makes sense to capture inflation though. The idea seems to be to measure the quality-of-life-impacting inflation and not just inflation. Which can make sense.

So if people can elude inflation of certain goods by buying differents and if that happens, inflation exists but doesn't actually impact quality of life. That seems to be the theory and foundation of the calculation logic.

The problem is that it's not necessarily true. If people completely stop buying product A (which's price increased 100x) and switch to product B (with the same price as before) then by the above calculation there is no inflation at all. However it could be that B is actually an inferior solution to their problem and while it works, they would prefer A over B when they cost the same.

So for the above calculation to be meaningful, the loss of quality-of-life would have to be measured in the case where one product is replaced by another one. And that is of course extremely difficult to do.

Therefore I would say that the above calcuation generally underestimates inflation.

It would probably be more honest to project inflation by defining a static consumer's basket and following it's price into the future. When done so, it will overestimate inflation the more time passes. So it can be combined with the method above. And the real inflation is somewhere in between.

> If people completely stop buying product A (which's price increased 100x) and switch to product B (with the same price as before) then by the above calculation there is no inflation at all.

If people completely stop buying product A and switch to product B then the model should do that as well because the model should try to match reality.

The CPI is about measuring prices of what consumers buy: the P and C in CPI.

> It would probably be more honest to project inflation by defining a static consumer's basket and following it's price into the future.

But that is not the purpose of the Consumer Price Index. There are other statistics available that may be useful:

* https://en.wikipedia.org/wiki/Personal_consumption_expenditu...

Or you could go out and measure the prices of these things yourself, as there's source code floating around that was used in academic research:

* https://thebillionpricesproject.com

* https://en.wikipedia.org/wiki/MIT_Billion_Prices_project

The CPI was setup for a particular purpose and it is good at that purpose. If you want to measure something else don't try to shoehorn it in, setup a metric for what you to measure rather rather than wreck what works.

Ok, but inflation is not cost-of-living and the CPI doesn't measure either of those directly.

Its often convenient for government to conflate the two; cost-of-living is a very flexible concept and so there are lots of way to get an answer you like, but they are distinct concepts.

Surely you can understand why a changing basket of goods makes for deceptive year-to-year comparisons.

> If people completely stop buying product A and switch to product B then the model should do that as well because the model should try to match reality.

Yeah, but it doesn't and it cannot. Because it's hard to measure if people reallt "switch" and if so, why and what it means to them.

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