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Both posts were excellent and I do think that central banks need to tell a better story than just changes in CPI (or whatever proxy they're using).

Anyway I commented on the original post at Catallaxy (it is safe to ignore the rest of the thread).

Good posts on a most important topic -especially for Austrian-school economists. Sometimes I feel that there are not enough Austrians specialising in monetary policy, which is truly a shame.

I have two comments on Frederic's points:
1. Hedonic price adjustments are questionable as a feature of a CPI index, particularly if that index is used as a monetary policy target. If there is an increase in quality due to productivity increases or higher differentiation, and there is some repercussion in the form of higher prices, first of all it is extremely hard to measure it properly (if at all). And what if there is a shift in relative qualities? (as there are shifts in relative prices) Even more difficult to measure. If Von Mises objected to simple CPI indexes as trying to measure something that is impossible to measure, the problem is compounded with nontransparent statistic alchemy such as hedonics or substitution coefficients.

Worst of all is the result that when there are productivity increases the CPI goes down, and that allows the central bank to be more inflationary without affecting the CPI in the short term. The consequence is that the Central Banks redistributes wealth from consumers towards the financial sector, the State and itself.

2. A fall in the CPI is not deflation. It can perfectly come from falling prices due to productivity increases or more competition. Deflation should be associated with the simultaneous contraction of money, credit and prices.

Another issue is that the argument about relative prices should be dealt rigorously. Now Central Banks are taking the increase in commodities prices or past increases in housing prices as "relative increases", "exogenous", "coming from supply constraints" -all of them excuses for applying expansionary monetary policies in the meantime. However, when those prices eventually fall, you bet that they want to include them or take them into consideration... to apply expansionary monetary policies.

I agree with all your comments. Because of the relative success of central banking in the last 20 years, we have come to forget that central banks are (de jure) monopolies and will act accordingly whenever possible. And the RBNZ is no exception.


The concept of hedonic adjustment is one of those things that sounds reasonable superficially, especially if its employment gives desired results, but which is actually economic nonsense.

If I buy a new computer for $500 every year, and the speed increases by, say, 100% annually and the hard disk storage space doubles each year, how should this impact the exchange value of the dollar?

The answer is, it shouldn't, not in any practical sense. Only if the new models unleash a significant increase in actual economic output, might it matter.

Why would the exchange value of the dollar care if the computer is able to spend twice as many microseconds waiting for your next keystroke, or if the hard disk has twice as much unused space for papers that you will never have time to write?

What matters is what you spend, the $500. You may well feel more subjectively satisfied with the new models, but this is not a proper basis for computing the exchange value of the dollar.

In general, you can't buy last year's $500 new computer for $250 because it will no longer be available. It will now be heading towards antique status as falling costs and competition force it out of production as new models take over.

Regards, Don

What does it mean that inflation is overstated? I would argue that that inflation is in fact understated, as it is principally a monetary process, and that technological and productivity improvements will hide the effects of said policy.

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