It’s so easy to forget that we pay for products with products. It’s not that we bring the fruits of our labor to Whataburger, but it’s that we have money to purchase taquitos, French fries and gravy at Whataburger precisely because our production rated the “money” that other producers take in return for goods, services and labor.
This basic truth about commerce further speaks to the superfluous nature of the Consumer Price Index (CPI). No doubt the latter has countless demerits, some known and some largely unknown.
The real problem beyond the CPI revealing higher prices that frequently have nothing to do with inflation is the conceit of such a measure. It implies that a bunch of government employees can somehow inform the producers and investors who power actual economic activity about the existence of inflation. Really, what a laugh.
To see why, consider yet again why we produce in return for money in the first place. It’s to attain goods, services and labor in roughly equal value to the goods, services and labor that we bring to market. Products for products. Always.
Since that’s true it’s no reach to point out that the producers accepting money for what they bring to market (meaning, everyone) know about the existence of actual inflation (the shrinkage of the unit of measure) long before the BLS does. To suggest otherwise, as in to suggest the BLS informs producers of what they didn’t previously know, presumes governments happen on dollars exchanging for less than do those actually transacting in dollars. No chance.
Furthermore, it ignores what the salary-men at the BLS rely on to measure what they imagine inflation to be: prices. The CPI moves up and down to reflect what’s already happened.
Assuming prices move as a consequence of currency devaluation, it’s just a reminder that what the BLS measures is a look backwards to reflect what producers and consumers have already happened upon. The inflation is the shrinkage of the unit of measure, while price movements in either direction are a reflection of information in the marketplace, information that can sometimes reflect inflation. Or sometimes not.
Prices remind us that producers handle all manner of things (including actual inflation) right away, and as one would expect. Products for products means monetary error will be sleuthed in the marketplace well before it’s found by the BLS, and this reduced trust in the unit of measure will similarly have an impact on the circulation of the unit of measure. Which is hopefully a statement of the obvious.
The more trusted a dollar, pound, euro, yen or yuan is, the more that actual producers will accept it in return for their production, and the more that it will be used to facilitate exchange of production. That’s why the dollar referees exchange around the world, and in countries where the local currency isn’t much circulated. Just the same, the less a currency is trusted for reasons like devaluation, the less it will circulate. Markets work, as in markets push devalued monetary units out of circulation long before central bankers attempt to do so with “open market operations.”
Taking this further, investors are in the business of returns in specific currencies. In our case, they put dollars to work in order to get more dollars in the future. This too is products for products. Savers and investors delay consumption with dollars now in order to consume in greater amounts in the future. To then pretend they’re unaware of what is occasionally “inflation” is similarly a laugh. It’s their job to know this.
Which is telling. CPI is logically not followed in pursuit of a lousy measurement of the past. If anything, this look to the past is followed as a way of gauging what government intervention might be in response. Which is a call for abolishing a superfluous look to the past.
Republished from RealClear Markets
