AlwaysLearningMore wrote: ↑Tue May 04, 2021 3:54 pm
"In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price. Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can "live with" by reducing their standard of living. This is incorrect:
the CPI's objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction."
https://tinyurl.com/wzdxj39u
"Constant level of satisfaction" seems subjective, especially with comestibles.
It would be interesting to see the details of the hedonic adjustments (and their effects on the overall CPI-U) published alongside the CPI-U data.
Inflation is a ordinal (ranking) value, not cardinal (scaler) value. It is personal, so it can't be used between people. It can't be used to compare 2 different points in time. It assumes you are a homo economicus and not a real person.
So, measuring inflation request subjectivity piled on top of subjectivity. On this foundation we are going to try to construct a price index to measure inflation.
With this in mind, there is less subjectivity than you think.
As a example, let us look at gasoline and cars. Since the 1960s the price of gasoline has risen dramatically, much faster than inflation. In particular, during the oil embargos of the 70s. The price signal here is clear. Oil is now more expensive to produce - please buy something else.
One response was to buy more expensive but fuel efficient cars. And while we can compare gas prices of the 70s verse today, we can't directly compare car prices. You can't buy a new land yacht like the full size rear wheel driven Oldsmobile Delta 88. Instead I have to buy a SUV with fancy crash zones, a more reliable engine, higher quality, etc. But we can compare indirectly. We can splice improvements and changes from year to year, step by step.
Another response is that you should spend your money differently. You don't throw you kids in the back of the station wagon for a long road trip. Rather you build a swimming pool in the back yard. This too can be measured by observing what people are actually buying. How their baskets change over time.
The problem is not subjectivity, rather errors in measure of estimation of observed people's behavior.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.