From Covid lockdowns to recent discussions of tariffs, there have been a lot of discussions about the price level and inflation. At times, these discussions focus on theoretical issues and different theories of price level determination. At other times, these discussions tend to focus on the measurement of the price level.
This isn’t some conspiracy theory about the government purposely misleading the public or adjusting the measurement of some particular price index to get a desired result. Rather, my claim is rooted in price theory.
Also some important CPI-related frameworks that Bitcoiners could learn from (as they/yous fuck this up ALL. THE. TIME.):
When relative prices change, consumers choose different bundles. Some make them better off. Some make them worse off. Some leave them indifferent between their current and previous bundle. The objective of any attempt to measure the price level should be to adjust the weights of the index in response to relative price changes such that utility remains constant
"What we are trying to track is the change in the monetary cost of a constant utility basket of goods"
E.g., price indices don't attempt to measure "cost" or "price" but "constant utility" -- hence all the fiddling with baskets and weights (derived, ironically and circularly and confusingly, from lagged past consumption data...). This is also, broadly speaking, why academic economists support a 2% inflation target -- aside from labor market/money misperception and anti-deflation reasons.
Substitution bias in the CPI:
when the price of a particular good goes up, the quantity demanded of the good goes down. (People substitute away from the higher priced good.) This attenuates the increase in the price level, properly measured, but not in our price index. As a result, the bigger the change in one particular relative price, the bigger the bias in the price index compared to the theoretically correct price level.
That is, if you only measure the price increase of say fancy steaks between periods, when the utility of "meat consumption" can be substituted by less-fancy steaks for similar utility, you end up overestimating the true increase in the (local, utility-derived) price level.
Dynamic decision-making: time moves, there are many time periods sequentially following one another... meaning there aren't just two goods and a present market, but infinite goods and infinite(-ish) time... meaning we need assets to move from one period to the next. Meaning we need ASSET PRICES IN OUR PRICE INDICES (this is an old-af observation, e.g., Alchien & Klein 1973 or Goodhart 2001)
Here's another aspect that Bitcoiners and hard-money types, excessively focused on money-printing, overlook:
Assuming that our theory of price level determination is correct, all of these relative price changes are going to introduce measured changes in the price index separate from the broader effect of the increase in the money supply.
Basically, real factors have price implications, too.
Also, this:
It is here that we have perhaps the biggest difficulty with limitations of our existing price indices. There is a commonly held view that the way in which monetary [policy] is transmitted through the economy is via the change in one crucial relative price: the real interest rate. Because the real interest rate — and asset prices more generally — are excluded from our commonly used price indices, these price indices will tend to systematically overestimate or underestimate changes in the price level, depending on the direction of policy. ... The prices of current consumption flows might be slower to adjust. If so, the measured price index will tend to underestimate the true increase in the price level because the index excludes asset prices.
TL;DR: basically Josh gets nowhere, but he teaches us a BUNCH of necessary things about prices, price levels, and inflation on the way there!
P.S.... I suspect Josh & Brian are writing a textbook... Gather up all the best Economic Forces articles, make some accompanying graphs and equations and voilà!