T Nation

Consumer Price Index

Inflation is not measured by prices and in fact cannot be measured by prices. Inflation has only to do with the amount of money in circulation. The CPI is meaningless for economic calculation purposes.

The more money in circulation the less it is worth and therefore the higher prices will generally become. Prices rise in certain sectors due to an increased demand for goods an services due to an increase in the money supply. The rise in prices associated with inflation does not occur immediately in all goods and services but takes time to ripple out as if it were a wave created by a stone thrown into a pond. Generally speaking the poor are the first to notice the rise in prices as they are the last to see the newly printed money – indicated by the lag in wage rates.

The CPI masks actual inflation by making a measurement in terms of prices when in fact it should be made in terms of total money supply (MZM). The question that needs to be asked is why the Fed thought it prudent to quit publishing these statistics for a less accurate measurement.

Unfortunately, the answer is merely psychological. People understand prices because they are an immediate indicator of ones standard of living. It sounds better the say that prices have risen 5% than to say that the inflation rate is 20%. However, it must be understood that the CPI cannot measure all prices in all places and therefore is meaningless.