Re:Using inflation tracking methods from 80s and 90s, inflat...
by TradingPlaces on Tuesday April 20, 2021 @12:49PM
(#26877179)
Hi. Long time lurker here. Finally something in my expertise.
The story of why they changed inflation measures may interest y’all, because PCs were the impetus. In the early 1990s, PCs were pretty widespread, and economists realized 2 things:
1. PCs were still not in the CPI “basket of goods”
2. They all had PCs with Excel and stat packages on them! Their data processing capabilities had grown exponentially in the past decade
So 2 major changes:
1. Rebuild the CPI basket of goods more often to reflect changing consumption patterns
2. Create a new measurement as part of Personal Consumption Expenditures (PCE) that rebuilds the basket every month based on what people actually bought.
The big issues tackled by PCE price indexes:
1. Measures what people actually buy, not some fictional basket of goods.
2. As such, it accounts for substitution effects. Apples get expensive, so you buy bananas instead, even though you prefer apples. If everyone stopped buying apples last month, it would not get counted at all in PCE.
3. Changing consumption patterns like the PC example.
CPI is good for tracking the price of one thing over time
PCE is good for tracking overall inflation, and within subcategories.
I now return you to your discussions of things I mostly don’t understand.
The story of why they changed inflation measures may interest y’all, because PCs were the impetus. In the early 1990s, PCs were pretty widespread, and economists realized 2 things:
1. PCs were still not in the CPI “basket of goods” 2. They all had PCs with Excel and stat packages on them! Their data processing capabilities had grown exponentially in the past decade
So 2 major changes: 1. Rebuild the CPI basket of goods more often to reflect changing consumption patterns 2. Create a new measurement as part of Personal Consumption Expenditures (PCE) that rebuilds the basket every month based on what people actually bought.
The big issues tackled by PCE price indexes: 1. Measures what people actually buy, not some fictional basket of goods. 2. As such, it accounts for substitution effects. Apples get expensive, so you buy bananas instead, even though you prefer apples. If everyone stopped buying apples last month, it would not get counted at all in PCE. 3. Changing consumption patterns like the PC example.
CPI is good for tracking the price of one thing over time PCE is good for tracking overall inflation, and within subcategories.
I now return you to your discussions of things I mostly don’t understand.