How to Use a Price Index. The Index Has Flaws, But it May Reveal the Trend. Watch for the Trend.
I get endless letters from strangers telling me not to trust the Consumer Price Index or some other figure.
Never are they economists. Never have they had training in statistics.
They are well-meaning people who do not understand the fundamental use of statistics: to identify a pattern or trend.
They really do believe that their suspicion regarding government statistics somehow insulates them from economic reality. It doesn't. If the statistics indicate a trend, and they invest opposite to the trend, they increase their risk.
They think I am naive to cite government statistics. They prefer no statistics . . . whenever the statistics run counter to what they want to believe.
Or they may appeal to non-public statistics, published on a subscription website, which they do not subscribe to. They cite summaries of these non-public, non-verifiable statistics which serve as advertisements to subscribe to his website. His website does cite any of his publications in professional journals related to economics or statistics, which indicates that he has no such publications. His non-subscribing readers like what they read even though they have no awareness as to how this man has come up with his figures. So, they tell me I am all wrong.
How do they know? They don't. They just have faith.
They forget what should be obvious: the assumptions built into the government's statistical models are rarely revised -- maybe once every 15 years. Also, the sources of the data remain the same: scientific sampling of specific groups. So, we can see a trend, despite the fact that an assumption may not be quite accurate any longer, or a data source not so reliable.
The assumptions and the data sources are the same over time, so we can make valid inferences from the trend.
I look for the trend.
You can't beat something with nothing. Pay attention to the trend. Be ready to spot a change in the trend.
When someone well-meaning but untrained critic of official statistics says, "Pay no attention to the government's statistics," ignore him. He is dangerously naive. You had better pay attention to the trend. Also, be alert to a change: a new trend.