Objectivity – a Pipe Dream ?

Read the beginning of the text

On Price Indices and Objectivity

What will the rate of inflation be next year? That question can be answered in several ways. A skeptic who adheres to the Pyrrhonic conviction that it is impossible to make predictions will look at last year’s inflation figures, which, assuming random changes in this macroeconomic indicator, would be the best estimate. An econometrician will apply his mathematical knowledge and modeling ability to analyze how inflation has been trending over the past years and whether it has been correlated with other variables. A (theoretical) economist will build a mathematical model determining the essential relationship between the endogenous inflation rate and exogeous determinants.

The estimates obtained in these three ways are likely to differ more than the average value of their ex-post error. Moreover, even an answer to the question about the inflation rate that was measured in the previous year is ambiguous. It can be given by indicating the value of the Consumer Price Index (CPI) or Producer Price Index (PPI) published by the US Bureau of Labor Statistics. Or one might use the value of the GDP deflator whose estimates are delivered by the Bureau of Economic Analysis. Then, for the sake of simplicity, one might compare the cost of the same basket of shopping bought today and a year ago.

Download the essay