Do We Need Google To Measure Inflation?

Google’s price index (the “GPI”) isn’t being published yet, but according to Google’s chief economist “the GPI shows a ‘very clear deflationary trend’ for web-traded goods in the US since Christmas.” And as the article mentions, MIT’s Billion Prices Project has tracked the CPI fairly closely, and is not showing high levels of inflation.

Prediction: inflation hawks who claim not to trust the CPI because it is put out by the government will not be convinced that there is not high inflation by these non-governmental indexes.

According to the BPP, we’re back to normal now. Looks like more ammo against QE2.

Doug – what you say is true. This is the reality we all are facing…

Blackadder, I think that there is plenty of room to debate what constitutes inflation. I acknowledge that the CPI might show a particular number, but is it a number that is useful for everyone? I haven’t found it useful in managing my household for the reasons I have mentioned. While a person running a factory may note in planning for next quarter that prices are down for washing machines, and another may note that a nice suit can be had for less money than in previous years, and collectively business and industry may note that prices for a large variety of goods are down, this is only a partial measure of how that affects consumers.

A wealthy consumer may find that their favorite high end salad dressing hasn’t increased in price, and breakfast cereal hasn’t gone up, but these are items with a high level of profit built into their price. A poor consumer will have an entirely different experience, and will find that those items which are lowest in price and require home preparation to add the value otherwise added in a factory have gone up substantially and continue to do so. One can hold off on purchasing a new washing machine and make the old one last, or buy a used one. If necessary, clothing can be washed by hand in the sink. I did this myself as a college student. But one must still eat. And it is not necessary to consume salad dress or breakfast cereal, but one must eat something. Housing may be down, but farmland prices are up, and energy is up. One can always ride a bike, but in our society it is socially unacceptable to expect to take a family bike ride of extended duration in inclement weather for basic transportation, and so energy has become as much a necessity as food. You can turn the heat down, but you can’t turn the heat off. You can no longer just cut a few trees from the back forty to tide you over next winter. It must be purchased from a utility. The things one can do without, those items with an elastic price, have adjusted to reduced demand. Other items, which are absolutely necessary to consume to sustain life have increased in price. The experience of the current economy for the wealthy in our country is vastly different from the experience of the poor in our country. Our methods of measuring inflation are of great utility for business and industry, but end up hurting the poor by not recognizing that they will have a much different experience than a CEO. Yet we continue to adjust benefits paid to those who cannot work based on information a CEO might be interested in and not on the actual changing experience of those who cannot work. We guide our economy based on a CPI that shows deflation in things that an underemployed person barely scraping by cannot purchase anyway, and fail to recognize that as that person’s income falls, those things which he absolutely must have, as opposed to things that he might want, have gone up in price.