It's common wisdom that when discussing income levels, changes in income, wages, compensation, etc that we must adjust for prices. This gives us "real" income, where prices are determined by the consumer price index (CPI). The problem with this is, as Doug French points out in a recent mises.tv talk, the CPI is arbirarily determined. A particular individual may value different things or things differently than is factored in the CPI. Given this, does that mean we should favor nominal data rather than real data when considering our incomes? Does this make comparing real income and its changes over time meaningless?
There are certainly problems with the CPI - certainly and a quick visit to shadowstats.com will show you the different ways government has measured inflation - (they progressively make changes to understate it). Certainly Doug has a point that one of the problems with CPI is that is doesn't take into account each individual's personal pie chart of expenses - it cannot possibly weight prices according to how each person spends. For example, if 80% of my income goes to food and energy, my personal CPI is going to be much much higher than what the government reports.
That being said nominal data is even more useless to use than real data. At least real makes the attempt - even though it is a bad one - to compare apples to apples. I'd suggest measuring your income in as many goods as possible - maybe start with gold or the shadowstats.com CPI which is the same as the official CPI pre-1980.
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Certainly check out the counter arguments to shadowstats as well though. It's likely that the true measure of consumer inflation is somewhere between the BLS' CPI and John Williams' CPI
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
Rothbard does an Excellent job in MES debunking the idea of any conception of "the price level".
The fact is that there is no "average consumer". People buy things. Some people buy other things. Other people buy larger quantities of things, some smaller. Some people during different periods of time. People change their buying habits with price fluctuations as well as with good changes. Furthermore prices go in all different directions. If the price of eggs rises and milk.
Only an individual can have a really reliable measure of price inflation, and this will be less or more valuable depending upon how much their purchases fluctuate. Common inflation measures can, at best, give us a general estimation of how much prices in general are rising, but even if we knew that it's still meaningless to an extent. In short: vague indicator, not measure.
On a semi-related note I would honestly guess that one of the reasons that it appears as though real wages have been falling in recent years is how much larger portions of American wealth are spent on electronic gadgets and things which aren't used in the "market basket".
"Certainly check out the counter arguments to shadowstats as well though. It's likely that the true measure of consumer inflation is somewhere between the BLS' CPI and John Williams' CPI"