Every once in a while I run into something that makes me nuts. Chain Weighted CPI is one of those things.  According to Investopedia:

An alternative measurement for the Consumer Price Index (CPI) that considers product substitutions made by consumers and other changes in their spending habits. The chain-weighted CPI is therefore considered to be a more accurate inflation gauge than the traditional fixed-weighted CPI, because rather than merely measuring periodic changes in the price of a fixed basket of goods, it accounts for the fact that consumers’ purchasing decisions change along with changes in prices. Because the fixed-weighted CPI may consistently overstate inflation by ignoring the disinflationary effect of quality improvements and new technology, in addition to the substitution effect, the U.S. Bureau of Labor Statistics maintains that the chain-weighted CPI is a closer approximation to a cost-of-living index than other CPI measures.

That sounds wonderful, but it no more of en empirical truth than the claim that vanilla ice cream is better than chocolate ice cream. The word to key on is “better.” That’s not an empirical term. Fred may be better than Joe, in the opinion of Fred’s mother, but Joe’s mother will hold a different opinion. On the other hand, if Fred is taller than Joe, that’s not a disputable opinion. It is an empirical fact. Economists at the BLS may feel one measure is better than the other, but that is meaningless. The rest of us are not living our lives to make the BLS happy.

How about accuracy? Here’s the example from Investopedia:

For example, consider the impact of two similar and substitutable products – beef and chicken – in the shopping basket of Mrs. Smith, a typical consumer. (Let’s ignore for the moment the fact that the “core” inflation rate ignores food and energy prices because they are too volatile.) Mrs. Smith buys two pounds of beef at $4 / lb. and two pounds of chicken at $3 / lb. A year later, the price of beef has risen to $5 / lb. while the price of chicken is unchanged at $3 / lb. Mrs. Smith therefore adjusts her spending pattern because of the higher price of beef, and buys three pounds of chicken, but only one pound of beef.

The fixed-weighted CPI measure would assume that the composition of Mrs. Smith’s shopping basket is unchanged from a year earlier, and would compute the inflation rate as 14.3% (i.e. the difference between the total price of $14 and $16 paid for two pounds of beef and chicken a year apart). The chain-weighted CPI measure would, however, consider the effect of Mrs. Smith substituting a pound of beef with a pound of chicken because of its lower price, and would compute the inflation rate as zero (because the total amount spent is unchanged at $14).

Now, we can pretend that chicken and beef are interchangeable products, even though they are not. We can also pretend that consumers value both equally, even though they don’t. We can also pretend that people value living in a nice neighborhood the same as living in a ghetto. We can pretend that people value walking to work the same as driving, particularly in driving rain storms.  In other words, the mischief potential makes this an entirely worthless method for measuring inflation. It is a step away from empiricism, which is the opposite of what any rational person would consider “better” or “accurate.”

What makes me nuts about this is the economists refuse to acknowledge this rather obvious problem. When you bring it up, the response is “how can we know people prefer X over Y and are not just responding to price?” In other words, confirmation of the defect is denial as long as it is in the form of a question. Then they quickly change the subject and/or lard up their response with meaningless jargon. It is what makes empirically minded people like me think economists are just witchdoctors for the current age.

This leads me to my closing rant on the economics profession. The only reason to care about inflation is the impact on consumers at the retail level. Life is for living. The point of public policy must always be the increase of happiness of citizens. When the people can upgrade to steak over chicken, they are happy. When they have to down grade to chicken from steak, they are unhappy. Pretending steak is chicken just so some dickhead in the BLS can go home early is no way to run a country.

This post has already been linked to 868 times!