Consumer Price Index numbers have recently been reported and the federal government assures us that they have inflation under control. Nothing to worry about, go about your business.
In a recent article I explained how government officials can report a low inflation rate by including only particular prices in their price level estimates. Price inflation is due to monetary expansion and the reported level of inflation can be manipulated by omitting the most inflationary prices from the calculations.
The total effect of monetary policy on the price level is also concealed by estimating price inflation in a manner that excludes part of these effects. Government agencies report price inflation. If they reported monetary inflation, the inflation estimates would be much higher. The Federal Reserve expands the money supply, driving prices up. However, by reporting price inflation as they do, the ruling elite lay claim to much lower inflation rates.
The purpose of price indices is to provide an estimate of the increase in a price level over and above some constant price level. However, price indices do not provide us with a measure of the actual increase in prices that is caused by our government's monetary policies. Government officials have an incentive to conceal how much their monetary policies affect the prices of the goods we purchase. One way to do this is to ignore, as price indices do, part of the price level effects of monetary policies.
First of all, there are reasons to dismiss any measure of a price level. Ludwig von Mises observedthat the "pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place. These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred." And in "practical life nobody lets himself be fooled by index numbers." Price indices do not provide us with accurate indications of the level of inflation. It is possible, however, to roughly estimate the price levels of various situations. For instance, it is possible to get some idea of the total price level effect of monetary policy.
Expansionary monetary policies drive prices up. However, if the money supply was fixed, prices would tend to fall. Any potential decrease in the price level is ignored by the CPI and by price indices in general. To estimate the total price effect of expansionary monetary policies, we must also consider the potential decrease in the price level that would have occurred in the absence of such monetary policies.