The Obnoxious Conceit of the Consumer Price Index

Senator Schumer thinks orange juice costs too much, while Senator McConnell thinks chocolate milk has become too pricey. Jerome Powell fears the cost of eggs.

All of the above is hypothetical, but what might your response be to laments about prices from political higher-ups? Hopefully it would be disdain.

Prices in market economies are the result of infinite decisions and global interactions taking place every millisecond of every day. Which is a long way of saying that prices are well beyond the capacity of politicians, economists, or realistically anyone to comment on.

Despite these truths, politicians, economists and pundits routinely see fit to comment on the price action of a “basket” of consumer goods that makes up the Consumer Price Index (CPI). Something is seriously wrong with this picture. See above if you’re confused as to why.

Prices are yet again a remarkable result of staggeringly sophisticated global cooperation. About them, no one realistically knows anything.

Yet we still have the CPI. The latter is accepted as a reliable measure of “inflation.” Readers should be skeptical. For one, the CPI “basket” is a creation of economists, federal bureaucrats, or name your person. It’s hopefully a reminder that depending on the basket, CPI could be soaring or falling at any given time.

Think the 2000s. During George W. Bush’s presidency, the price of a barrel of oil sextupled. The cost of newspapers and dress shirts soared too. Despite this, CPI inflation was largely quiet during Bush’s presidency. This is notable because if CPI had been measured in the 2000s the way it was in the 1970s, George W.’s middle name would have been Carter, or Nixon. Figure that it wasn’t just oil that soared during Bush’s presidency. So did the price of gold measured in dollars. It was Carter and Nixon all over again, minus the CPI reflection.

Again, depending on the basket, “CPI inflation” could be very high or very negative. Considering recent years, had it been the cost of broadband, communication and Dell computers, the CPI would have been negative. Except that today’s CPI is heavily informed by rent, which is up, food (groceries feel expensive), along with seemingly obscure items like used motor vehicles. They’re up too. Of course, if certain market goods are more expensive, by definition other goods are cheaper. There’s no getting around this truth. After all, economics is defined by tradeoffs vivified by prices. If we’re paying more for hamburger patties, then we logically have fewer dollars for other market goods.

All of which speaks again to the remarkable sophistication that goes into what we call prices. So much around the world informs them, with the interconnected nature of global production unquestionably the biggest driver of ever falling prices, by far.

Despite this, politicians, economists and pundits have happened on the market basket that informs CPI as a reason for the federal government to intervene. Specifically, they want the Fed to intervene in the cost of credit as a way of bringing down prices that are an amazing consequence of infinite actions taking place around the world. Which means the Fed’s actions are much more than obnoxious. They’re first and foremost a non sequitur.

Indeed, calls for the Fed to act presume that people with names like Powell need to discipline us lest prices rise too much. Can they be serious? They think they are.

More realistically, the only thing the feds can do is pursue stability in the dollar they issue as a measure of value. Nothing else. The only problem is that the dollar’s exchange value is not part of the Fed’s policy portfolio, and never has been. It’s a reminder that in case anybody cares, the Fed is excess on the matter of inflation.

Reposted from RealClear Markets


  • John Tamny

    John Tamny is a popular speaker and author in the U.S. and around the world. His speech topics include "Government Barriers to Economic Growth," "Why Washington and Wall Street are Better Off Living Apart," and more.

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