The British government and the BBC are celebrating that there has been “the first monthly fall in food prices since 2021” due to inflation remaining flat. It’s being welcomed as a huge win in the government’s battle against inflation; they had set a target to halve inflation and they have done it! That’s what you would think if you were a casual media viewer.
No doubt we will hear from members of the government just how great this really is and how they should be lauded as the slayer of inflation. However, much like Tantalus attempting to sustain himself, government attempts to capture the true rate of inflation using the CPI are always short of the mark. The Consumer Price Index (CPI) is a measure of inflation that examines the average change in prices paid by consumers for a given basket of goods and services over time. It is a very common indicator used by various governments like the United States to calculate the true rate of inflation. There are quite a lot of problems with the Consumer Price Index, though. It often understates the true level of inflation, allowing for the party in power to take all the political credit for lowering inflation and making people’s lives easier. Diving into the CPI reveals an awful lot.
The CPI uses very broad terms. How do the statisticians know what an “average” egg, vehicle, or loaf of bread is? The truth is that they cannot possibly know because they are not the individuals making the decisions about how to use their money. This is the modus operandi of government; they make what they say are “educated guesses” because they cannot get all the information necessary to command the economy to create the most efficient outcomes. No one individual is the same, even day-to-day. So, in creating the CPI statisticians are already starting from a losing position since they take a static view of prices and then must assume that the decisions of millions of individuals stay the same until they are next asked. This is complete denial of reality.
Think about it: you can completely go off certain foods out of nowhere because it suddenly does not taste right, or it just does not hit you with the same level of satisfaction. This applies to all different types of goods and services. Tastes can turn on a dime, so taking a static view of tastes and preferences (which is what the CPI does) is a denial of human behavior.
Also, how does the CPI deal with changes in quality of items? Say the new Android phone releases at the same price as the previous; what do they do in this situation? They often increase the weights for goods going down in price and reduce the weights of things increasing in price. If quality rises then the statisticians reduce the price of the good “hedonically” i.e., more guess work about quality of individual characteristics of the good in question.
This type of work is fundamentally arrogant. Through these calculations government actors are effectively saying that we know how “most” people spend their money. In all fairness, most economists would admit some flaws in the calculation of CPI but again, that does not stop politicians from using it for their own political aggrandizement since those same economists say it is our best measure of inflation. The casual listener to political news i.e., the majority of most countries, will never hear economists say that the CPI is flawed. Instead, all they hear is politicians using it—when it suits them—to justify making decisions that impact vast swathes of people. In that way, it does not matter that it’s flawed but our best option for measuring inflation (that is also debatable, but too long to talk about in this article). The reality is that it’s being used for these decisions and will continue to be used.
There is no such thing as the average British family; each household has their own specific tastes and preferences that are constantly changing. It would be foolhardy to make any sort of potentially very impactful decision for your family based off information that you know has changed a lot since you last obtained it, yet government actors do that very thing. But that is a built-in part of democracy. The majority, through whatever voting system it may be, get their preferences favored over the minority. Does that now mean that it is good for the minority? Of course not, it’s not their preference to get something they do not want.
The Consumer Price Index operates in a similar fashion with respect to the outcomes it produces from its findings. The “average” British family’s financial decisions essentially influence government actions made on a national scale, but that is hardly a good indicator for how everyone should be treated. Even the households considered average will want different things. The “average” family in Liverpool will have wildly different needs and wants to the “average” family in Kent.
Our individuality is what makes humanity so successful. We have so many different interests and attributes that have allowed us to work together to pull ourselves out of the state of nature. Our individuality has given us a level of abundance that no other creature to ever walk the Earth could even get close to. Historically, our recognition that someone else should not make us do something we know does not suit our individual preferences has made humanity progress to the conditions we live in today.
The Consumer Price Index is a tool that goes against all that. It attempts to give government actors enough information to influence our lives since that is presumed to be what we all want. They cannot know that. Be wary of politicians who use the CPI as a good metric to justify their decisions. I have walked through why it is fundamentally flawed and, in the end, it comes down to Twain’s old saying, “There are three kinds of lies: Lies, damned lies and statistics.” It just happens that government actors use all three to great effect.
