Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Consumer Price Index (CPI), A Standard of Living Problem

Economics / Inflation Oct 04, 2010 - 12:32 PM GMT

By: Chris_Riley

Economics

Best Financial Markets Analysis ArticleThe CPI is a cost of living indicator, calculated with a basket of goods that varies over time. As it is attempting to measure price changes in a typical consumption basket, it does not compare price changes across a like-for-like basket of goods over time. This has caused large under measurement of the true rate of price inflation when living standards have been falling and over measurement of price inflation when living standards have been rising. This is a major problem, as we need to measure price changes whilst holding the standard of living constant i.e. across a fixed basket of goods. But that would invalidate the CPI as a measure of change in the cost of living.


As living standards fall, people switch into lower quality goods. This then affects the composition of goods within the CPI basket as consumption patterns have changed. The deterioration of goods within the CPI basket causes a downward bias, as the comparison within the basket is not like-for-like over time. An example of such a period would be the 1970’s. We observe here a large downside deviation in the CPI calculation, relative to the change in price of physical commodities such as gold or oil, which are not deteriorating in quality.



During times of economic expansion, incomes increase and people switch into higher quality goods. This change in consumption patterns leads to an upward bias in CPI relative to commodity prices. An example of such a period is 1980-2000.



From 2000 onwards, we have switched back to a time of economic destruction. Standards of living are on the decline and once again the CPI is heavily under-representing the true rate of price change.



In order to measures price changes across a constant standard of living, it is useful to measure the price movement of physical commodities (where quality does not vary). An ounce of gold is still an ounce of gold & a barrel of oil is still a barrel of oil, regardless of any changes in living standards. This strips away the distortions of the CPI measure. This was how price inflation was measured in the past: currencies were pegged to the price of gold, under the Gold Standard. It remains a useful way to deflate asset class returns today.

By Chris Riley

For more articles and charts, check-out my new website: www.goldbugz.co.uk

© 2010 Copyright Chris Riley - All Rights Reserved

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Neptune Global Holdings LLC (Neptune). The author has made every effort to ensure accuracy of information provided; however, neither Neptune Global Holdings LLC nor the author can guarantee such accuracy. This article is strictly for informational purposes only and a sampling of diverse editorial opinion.  It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Neptune Global Holdings LLC and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  Neptune does not act as, nor offer the services of, an investment advisor. Individuals should conduct their own due diligence before making any investment choices.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules