Topic: Price inflation =/= Monetary inflation , but why do CB use the CPI data then? - page 2. (Read 2496 times)

Anybody else wants to address this conversation, it's very important to discuss this guys, so please join us! 

I see, but many CB other than the FED do use the CPI, and also many economists use it in their works aswell, when its obvious that it's a useless number.


I`m skeptic, i`m not sure if the quantity theory of money is correct, i`m not a monetarist. It just seems common sense to me that it doesnt matter what people believe to be true when it's not true.

You can create artificial scarcity by making people spend faster, but if the underlying numbers are not corresponding to reality, you just created a fake bubble that will pop out (unless you keep it artificially pumped as it is now with 99.9% of derivatives).

I`m not sure if monetarism is correct.


Yes it is, but if the information is hidden, then it needs time to trickle down to the ordinary people.

It will need price discovery, and every transaction will adjust itself based on the previous inputs. People will sense the devaluation in their guts, so the price discovery method will eventually reflect the fair price, but this process can last years, if it's well hidden.

See if the numbers say 1 thing (reality) and people believe other, thant that will just create a bubble, and many people will lose money or overpay for things, where as the crooks who know the real value of stuff, can use valuation tehniques to do insider trading.

For example they know that the price of eggs (fair price) is 2J, but the average guy thinks its 1J, so they just buy them all at 1J, and once the guys find out the fair price is actually 2J, he will sell it, and thus by insider info he can profit.

Probably they use this tehnique in the derivative markets.


Not necesarly, because if entepreneours are fooled, and they are hesitant to increase wages, than nobody will buy at higher prices (stagflation), so shopkeepers and other vendors would have to cheat the consumer by offering less for the same price.

It all depends on consumer sentiment, people are dumb and they dont realize they buy 195 grams of cornflakes for the same price as 200 grams of cornflakes before. Nobody looks at the "quantity" numbers such as kilograms, grams, or pounds whatever.

Or they decrease the quality, which is even more hidden, they add soybeans into the meat.

Have you eaten sausages before? I swear the quality of it decreases year-to-year, they add more and more additives and it contains less meat. Some say they even add rat-meat to it.

So put aside conspiracies, the quality can be very easily hidden, and it can trick consumers easily.

Because consumers are dumb, they only see that prices increase, so they only shop in the store where its cheaper. And there is only 2 way of selling cheaper food: either you decrease the quality of it, which is hardly noticable, or you cheat the sales tax, which is more riskier.

So by just staying ahead of your competitors by offering to sell less quality food for less price than your competitors in an inflationary enviroment, you attract more people, than by increasing the price.

Trust me i know this from experience. Shrinkflation is more efficient, than to let prices rise.

+ Retail consumers (90% of economy) , dont really know the Wholesale prices, so they are the last people where the information of prices goes.


Of course it is, read previous reply. If everyone sells at the same price, but sell lesser quality products, then the inflation can be forever hidden, and suddenly people wake up that the quality of products is sub-human.

Falling houses because they used less and less cement in the walls, people die of food poisoning because the sausage contained poisonous ingredients that were cheaper on the black market, then normal ingredients, etc etc

It's always nice to theoritize inflation, but once those academic punks go out in the real world, they see all their theories failing, because reality is far from their theories (i`m talking about Keynesians, and Monetarists aswell here).

Price inflation=The rise of prices in % in a given period of time (The term is really bogus, it should be "price increase" because prices actually dont inflate, they increase or decrease)

Monetary inflation= The expansion of the money supply in an economy

So to an amateur the 2 concepts look the same:

Let's take a simple example: Joe is the king of Joeania, and he issued a currency named "J". He issued 100 units of J, to his subjects. And thus the average price of eggs in his kingdom costs 1 J. One day, Joe decides to print 100 more units of J, thus expanding the money supply to 200 J, now after the subjects discover this action, which in his kingdom is transparent, he announces every monetary policy to the public, the price of eggs increases to 2J, not because the eggs are worth more, but because the purchasing power of J just halved, thus the new 2J is actually worth only 1J of before the expansion, so the value is the same, but the reference, the currency has changed.

So in that example above, once the monetary inflation happened (printing 100J, doubling the supply), the price of eggs immediately doubled. So to an amateur, the PRICE INFLATION and the MONETARY INFLATION look identical.

But in reality they are as far from being equal as a cow is not equal to a chicken.In theory, they might look identical, and many economists think they are, but they are not

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So what if Joe decides not to reveal that he increased the monetary supply? Then his subjects would find out the devaluation of the currency much later, when the taxmen would come and ask for double taxes, so the entepreneours would have to pay double salary to people, and the entepreneour would purchase his inventory of goods aswell for double price from his partners, and the inflation would tricke down much slower into the economy.
Even though the Central Bankers in Joeania would immediately know that the J's purchasing power is halved, the subjects would only know it on a longer period of time, which could be even years.

But this is just a transparency issue (which most CB don't have, for example the US. FED hides the M3 numbers, I wonder why  )

But let's pretend that CB are honest and transparent, which is a huge assumption, but just for the sake of example let's pretend.

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So even if the CB is honest and announces the monetary expansion immediately, what if the egg seller in Joeania decides to not increase the prices, but rather decrease the quality of eggs supplied. He will sell his eggs for 1J, but he will sell rotten eggs too in his basket, or he will just fire a few workers on his egg farm, decreasing it's cost, and make the rest of his employees work harder for the same wage, thus he can now afford to sell the eggs for 1J, but actually it's not just that his producing cost halved, but he even makes more profit than before if we were to compare his income and cost to a 3rd party currency.

This process is called "shrinkflation".

So even thought the price doesn't increase, just by laying off a few workers, or decreasing the quality or quantity of the products, the inflation can be hidden.

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With the processes above, we can hide the inflation in the unemployed numbers, the inventory orders numbers and in the product itself, weather we decrease the quality of the product, replace few ingredients with cheaper ones, or just plain decrease the quantity of it, THE CPI numbers remain the same, but the inflation will rise!

Also the unemployed numbers can be hidden even further by just, not counting the unemployed persons after they are not eligible for subsidy/welfare anymore. They didnt found a job, but they didnt applied for welfare, so they are technically employed according to the governments.

So with these techniques, the inflation can be so well hidden, that only Central Banks know it really!
(USD official inflation rate ~0.7%, when in reality its more around 6%)

So if this is the case, and it is, then why the fuck do Central Bankers use the CPI (Consumer Price Index) or CPE numbers to estimate the inflation because they are useless bullshit and wrong information?

The only way to know the real inflation is to just look at the M3 numbers (Oh but that is hidden by the FED, and not published anymore since 2006, geez I wonder why?  )