I do not agree that market prices are the worst way to detect inflation. While market prices have limitations, they remain a foundational component of understanding inflation when used appropriately and in conjunction with other indicators. Here's why:

Strengths of Market Prices in Detecting Inflation

  1. Direct Impact on Consumers Inflation is often defined as a general rise in the price level, so market prices provide an observable, real-world measure of how costs are changing for consumers and businesses.

  2. Broad Coverage: Market prices cover a wide range of goods and services, offering a diverse snapshot of economic activity. Aggregate measures like the Consumer Price Index (CPI) or Producer Price Index (PPI) aim to smooth out the noise from individual price changes to capture underlying trends.

  3. Immediate Feedback: Changes in market prices are readily observable and provide timely indicators of economic trends, which is essential for policymakers and businesses.

  4. Empirical Validity: Over time, consistent increases in market prices across sectors are closely associated with inflationary periods, demonstrating their reliability in reflecting inflationary trends.

Limitations of Market Prices

  1. Short-Term Volatility: Prices can be affected by supply shocks, technological advancements, or seasonal factors unrelated to inflation, leading to noise in the data.

  2. Subjectivity in Inflation Measurement: How inflation is measured (e.g., which goods and services are included in the "basket") affects the interpretation of market prices. This can introduce bias or fail to reflect individual experiences of inflation.

  3. Asset Prices Often Excluded: Traditional market price indices sometimes exclude critical areas like housing and financial assets, which are also impacted by inflation.

Alternatives Are Not Perfect Either

If market prices were dismissed as a measure of inflation, alternatives such as tracking only the money supply (e.g., Tamny’s preferred approach) have their own weaknesses:

  • Velocity of Money: Money supply alone does not determine inflation; how quickly money circulates also matters.
  • Globalization and Innovation: These factors can suppress price increases even during periods of monetary expansion, leading to misleading conclusions if only money supply is considered.

Conclusion

Market prices are not a perfect measure, but they are far from the worst way to detect inflation. They are a crucial part of a broader toolkit that includes money supply, wage growth, and asset prices. Ignoring market prices would deprive us of essential, observable data that captures how inflation affects the economy in real time. A nuanced approach, rather than outright dismissal, is more productive.