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Regarding the bls.gov link you linked.... 1) The link explicitly claims that hamburger was not substituted for steak (and the shadowstats link does not contrad

by jholman 14y ago

Regarding the bls.gov link you linked.... 1) The link explicitly claims that hamburger was not substituted for steak (and the shadowstats link does not contradict this, only claims that it was proposed). So why are you claiming that Greenspan did perform this substitution? 2) I don't find their explanation laughable at all; I find it entirely plausible. And, without having read all of the shadowstats site (only about half of the article on the CPI), I found it ... long on wild claims, short on methodology or references. With this in mind, I'd be curious to hear a clarification of what you meant, and why you believe it.

msandford 14y ago
A regular average would suggest that the basket of goods used to compare from interval to interval does not change. In other words, a 1lb ribeye in 1950 is the same as a 1lb ribeye today (in quantity, not price). If it's included in the CPI then the price increase is reflected properly. Using a geometric average implies that the basket of goods selected CHANGES depending on the change in prices. So in 1950 when a ribeye was cheap, 1lb of it was included in the basket of goods. Now that it's more expensive, only 0.5lbs of it are included in the basket. This is a made up example. Prices are not correct. Just for illustration. 1950: hamburger - $0.50/lb ribeye - $2/lb arithmetic mean: (2 + 0.5) / 2 = $1.25 geometric mean: sqrt(20.5) = $1.00 2012: hamburger: $3/lb ribeye: $18/lb arithmetic mean: (3 + 18)/2 = $10.50 geometric mean: sqrt(318) = $7.34 Arithmetic inflation: 10.50/1.25 = 8.4 Geometric inflation: 7.34/1 = 7.3 The geometric mean has two wonderful properties: 1. It makes the average price lower by adjusting the quantities included based on their relative prices 2. It makes the inflation over time seem lower as well I'm not saying that this is some giant conspiracy by "the man" to "keep us down" but I would argue that it's intellectually dishonest. In order for the CPI to be useful to make comparisons from one year to another the quantities of goods in the basket have to remain constant. Since the geometric mean effectively varies the quantity in the basket (relative to arithmetic) I would argue that it robs the CPI of any power to provide real comparisons.
- yummyfajitas 14y ago
  You are correct that for chained CPI to measure inflation, the basket of goods would need to remain constant. Among other things, if we want CPI to be well defined in 1970, then CPI in 2012 would need to exclude all goods invented after 1970. If we did this correctly, inflation would likely be drastically lower. The biggest driver of inflation is health care, and 1970's health care is pretty cheap. In fact, CPI only measures instantaneous inflation - the inflation rate of today's basket of goods. It is fundamentally incorrect to treat chained CPI as inflation, particularly over long periods. If you actually want to measure inflation between two endpoints, you'll actually need a formula which depends on the starting year - i.e., you'll have CPI1970 which will be fundamentally different from CPI1990 or CPI2012.

by jholman 14y ago

msandford 14y ago

A regular average would suggest that the basket of goods used to compare from interval to interval does not change. In other words, a 1lb ribeye in 1950 is the same as a 1lb ribeye today (in quantity, not price). If it's included in the CPI then the price increase is reflected properly. Using a geometric average implies that the basket of goods selected CHANGES depending on the change in prices. So in 1950 when a ribeye was cheap, 1lb of it was included in the basket of goods. Now that it's more expensive, only 0.5lbs of it are included in the basket. This is a made up example. Prices are not correct. Just for illustration. 1950: hamburger - $0.50/lb ribeye - $2/lb arithmetic mean: (2 + 0.5) / 2 = $1.25 geometric mean: sqrt(20.5) = $1.00 2012: hamburger: $3/lb ribeye: $18/lb arithmetic mean: (3 + 18)/2 = $10.50 geometric mean: sqrt(318) = $7.34 Arithmetic inflation: 10.50/1.25 = 8.4 Geometric inflation: 7.34/1 = 7.3 The geometric mean has two wonderful properties: 1. It makes the average price lower by adjusting the quantities included based on their relative prices 2. It makes the inflation over time seem lower as well I'm not saying that this is some giant conspiracy by "the man" to "keep us down" but I would argue that it's intellectually dishonest. In order for the CPI to be useful to make comparisons from one year to another the quantities of goods in the basket have to remain constant. Since the geometric mean effectively varies the quantity in the basket (relative to arithmetic) I would argue that it robs the CPI of any power to provide real comparisons.

yummyfajitas 14y ago
You are correct that for chained CPI to measure inflation, the basket of goods would need to remain constant. Among other things, if we want CPI to be well defined in 1970, then CPI in 2012 would need to exclude all goods invented after 1970. If we did this correctly, inflation would likely be drastically lower. The biggest driver of inflation is health care, and 1970's health care is pretty cheap. In fact, CPI only measures instantaneous inflation - the inflation rate of today's basket of goods. It is fundamentally incorrect to treat chained CPI as inflation, particularly over long periods. If you actually want to measure inflation between two endpoints, you'll actually need a formula which depends on the starting year - i.e., you'll have CPI1970 which will be fundamentally different from CPI1990 or CPI2012.