Sunday, January 10, 2021

The Implausibility Of The Chapwood Index — Brian Romanchuk

The Chapwood Index has become a popular source to cite by hard money proponents who are pushing the line that inflation is really much higher than what government statisticians suggest. It has taken over the limelight from Shadowstats, which pioneered that creating a website pushing that particular line. Although it is entirely expected that individuals can face cost of living increases that rise faster than official the CPI inflation rate, the levels of inflation suggested by the Chapwood Index do not appear to offer any plausible information about the price level as the concept is used into macroeconomics.
Bond Economics
The Implausibility Of The Chapwood Index
Brian Romanchuk

1 comment:

Ahmed Fares said...

CPI figures actually overstate inflation, not understate it.

The problem is that it overstates inflation. The beancounters know this, even if they are loathe to mention it because there is no easy solution to the problem. To understand the issue, look at how we use television prices in our measure of inflation. We now measure different TV sizes. Screens that are larger than 40 inches are included in the basket. This may not seem like an economic issue of great importance, but it is illustrative of why we over-measure inflation.

The biggest price reductions in new technologies — including large televisions — come while they’re still toys for the rich. It’s only when many of us buy something that we include it in the inflation measure – but most of us only buy things once the price has dropped and it is no longer a toy for the rich. When mobile phones first arrived in the UK they cost more than most of the second hand cars I’ve had and airtime alone was pounds per minute. Now they’re more or less an essential. And we’ve all got them because they are cheap. They entered the inflation basket well down the steep cost curve that has taken their price tag from eyewatering to “who cares?”

This problem is not disputed; it just isn’t talked about too much out of embarrassment. US guesstimates are that inflation is overstated by 1 to 2 per cent each and every year because of this. ONS insists the UK does better than this but then they would say that wouldn’t they?

Compounded over decades, this small mistake makes a big difference to our view of economic progress. We work out the inflation rate so we can deduct is from nominal growth to get to real. But if we overstate inflation by 2 per cent over 35 years, our economic statistics could be telling us we’re no better off at all while in fact real living standards, real incomes have doubled. And the more that our economic growth is being driven by advancing technologies then the worse this problem will be.
—Tim Worstall