7 ms·

I understand what you are saying, but you've just shown how versatile substitution is. If wheat spikes they can substitute oats for the time being. If chocolate

by muraiki 15y ago

I understand what you are saying, but you've just shown how versatile substitution is. If wheat spikes they can substitute oats for the time being. If chocolate spikes they can substitute sugar candy. However, I think that when a non-economist thinks of the CPI, what they are considering is if they can maintain the same quality of life over a period of time for the same amount of money. As you say, this does keep the CPI stable, but I think that the way an economist experiences the CPI is different from the way the average consumer does. For the consumer who has a relatively predictable pattern of food purchases, the response is "Wow, why does it cost so much more for me to buy the same stuff this year than last year?" They experience price inflation and their economic decisions are affected by it, but the CPI remains the same. If we want to talk about how the consumers weather pricing changes, then substitution doesn't reallyconvey their experience. Yes, the average person will say, "let me get something else instead of peanut butter," but the CPI doesn't account for the "anhedonic pain" of substitution, to poke fun at their own terminology.

yummyfajitas 15y ago
...the CPI doesn't account for the "anhedonic pain" of substitution, to poke fun at their own terminology. Yes it does, or at least it attempts to. The hedonic penalties are exactly the hedonic benefits with a minus sign. If guacamole is 2x as good as salsa, then if the price of guacamole doubles from $5 to $10 and consumers switch to $3 salsa, then mexican dips have increased in price 17%. Look, I'm not saying a good job is done. In fact, I've argued many times that inflation is wildly overstated. I'm just saying that the hedonic adjustments and substitution adjustments are necessary if you want to have any sort of CPI-like measurement. Of course, it's also the case that CPI doesn't actually measure inflation. To get a real inflation measure, you'd need to measure the price of a fixed basket of goods. But then no statistic like CPI would even be possible, since inflation would no longer be a rate - Inflation(1970, 2012) would not be equal to Inflation(1970, 1990) x Inflation(1990, 2012).

by muraiki 15y ago

yummyfajitas 15y ago

...the CPI doesn't account for the "anhedonic pain" of substitution, to poke fun at their own terminology. Yes it does, or at least it attempts to. The hedonic penalties are exactly the hedonic benefits with a minus sign. If guacamole is 2x as good as salsa, then if the price of guacamole doubles from $5 to $10 and consumers switch to $3 salsa, then mexican dips have increased in price 17%. Look, I'm not saying a good job is done. In fact, I've argued many times that inflation is wildly overstated. I'm just saying that the hedonic adjustments and substitution adjustments are necessary if you want to have any sort of CPI-like measurement. Of course, it's also the case that CPI doesn't actually measure inflation. To get a real inflation measure, you'd need to measure the price of a fixed basket of goods. But then no statistic like CPI would even be possible, since inflation would no longer be a rate - Inflation(1970, 2012) would not be equal to Inflation(1970, 1990) x Inflation(1990, 2012).