How Blockchain Can Fix The Broken Consumer Price Index
Inflation: Bye-Bye Buy
Does it seem like with every passing year that the dollars in your wallet buy less and less? This phenomenon is due to inflation, a force that slowly dilutes the dollar’s purchasing power over time. Inflation primarily occurs when the rate of dollar creation outpaces the rate of economic expansion. Inflation isn’t always bad, but shrinking goods and growing prices kind of sucks. How did we get here?
Governments and economists have devised a metric used to track inflation known as the Consumer Price Index, or CPI. While initially an accurate index, the CPI has become less reliable due to periodic adjustments that understate the actual inflation rate. Blockchain technology is poised to upend these inaccuracies. Ramifi is leading the charge to bring transparency and accountability back to inflation calculations.
How Did We Get Here?
Dating back to 1917, the CPI has undergone several significant shifts since its creation. The most significant of these changes is the ongoing debate surrounding what type of inflation the CPI should track. Yes, there are multiple types of inflation but don’t worry, they’re pretty straightforward.
The CPI was initially envisioned as a Cost of Goods Index (COGI), helping policymakers better understand how the money creation process impacted critical producer and consumer goods prices. Think of things like steel, oil, corn, and wool.
Over time, however, the CPI evolved into a Cost of Living Index (COLI), which tracks changes in the cost to maintain a certain standard of living. Think of things like housing prices, tv dinners, and how much it costs to keep the lights on at home.
While this might seem beneficial to the average consumer on the surface, the average cost of living is a downstream byproduct of producer goods. You can’t have the former without the latter. Consequently, this has led to policy decisions that inadvertently negatively impact the price of producer goods. The shift from the CPI being a COGI to a COLI has resulted in a butterfly effect — the CPI no longer accurately tracks inflation.
Inflation ain’t what it used to be —
Why The Big Change?
This shift began to result in profound consequences for consumers starting in the mid-1980s. Fed Chair Alan Greenspan testified to Congress that the CPI overstated the inflation rate by a significant margin. Greenspan suggested that the index required periodic adjustment to assure its accuracy.
The subsequent changes to the CPI allowed for several substitutions. Rather than accurately tracking inflation for a fixed basket of goods, these changes assumed that consumers would substitute lower quality goods in the face of rising prices.
For example, the initial round of changes to the CPI allowed for hamburger meat as a substitution when steak prices rose too high. If you don’t think this is dubious, order a steak next time you’re at a restaurant and see how you react when they bring you hamburger meat.
These substitutions have a clear effect — as both consumers and the CPI substitute lower quality goods, the CPI remains depressed. Due to this lowered metric, policymakers, in turn, justify inflationary policies, forcing consumers to lower further the quality of goods that they consume. This negative reinforcing feedback loop is a net negative for the average consumer and only serves a select few’s interests.
Consumers switch out steak for hamburger meat, and the CPI remains low — mission accomplished! Low CPI means more room for inflation, which means consumers eventually are switching out hamburger meat for canned mystery meat.
In the wake of artificially low inflation metrics, policymakers justify lower social security and social welfare payments while allowing higher money creation and monetary debasement rates. This bait and switch is disastrous for 99.5% of the population.
When You Can’t Substitute, Subvert
In addition to these substitutions, the CPI fails to account for several crucial metrics that impact the average consumer. When it comes to housing, the Bureau of Labor Statistics utilizes two metrics: one for homeowners and a separate renters metric.
The question posed to homeowners fails to track the owner’s property’s market value accurately. Instead, it asks survey participants to estimate the rent equivalent of their property. While not fundamentally flawed, this metric is much less accurate than calculating homeowners’ average mortgage payments directly.
The CPI’s rental calculation also contains a dubious downside. Long-term tenants are often paying well below the market value for their rented domicile. This asymmetry means that individuals who rent new domiciles more frequently aren’t adequately accounted for as the total average price of housing rises more slowly than the average price of new units.
Such a miscalculation disproportionately impacts low-income families. Once again, the poor’s poorest end up shouldering a larger share of the financial burden of these miscalculations. Luckily the transparent and immutable nature of blockchain fluidly solves the complex issues presented by the CPI.
How Blockchain Tackles CPI’s Big Issues
Changes to the index are often opaque and difficult to discern — despite being publicly available data, substitutions wind up spread across several different pages and papers. Blockchain’s real-time updates allow individuals and auditing firms to translate with ease and changes and substitutions in the CPI.
Furthermore, blockchain’s censorship-resistant nature makes and amendments to the CPI immutable to post-ex-facto changes or redactions. Immutability and transparency are cornerstones of accountability, and blockchain accomplishes both seamlessly. Ramifi is at the forefront of accurately tracking inflation in place of the CPI.
By utilizing a dynamically weighted basket of commodities, Ram tokens are soft-pegged to the value of an inflation-adjusted dollar. While commodities experience degrees of fluctuation, increasing efficiencies and global wealth creation is ultimately deflationary.
These factors should cause the costs of goods and services to decrease over time. However, rampant monetary debasement offsets this trend, outpacing the deflationary force of growing economies and negatively impacting the dollar’s purchasing power.
By weighing the dollar’s purchasing power against a basket of commodities, Ramifi offers a clear picture of inflation. Periodic adjustments assure that Ram tokens’ price accurately reflects any significant changes in the dollar’s purchasing power.
Rather than relying on an opaque, centralized, and self-interested authority to be the arbiter of inflation data, Ramifi offers a dynamic and auditable blockchain alternative that seeks to revolutionize inflation metrics, bringing long-overdue transparency to the entire process.