May 14, 2007

There is life outside the consumer basket

Wolfgang Münchau writes about “The problem with inflation indices” May 14, and I agree with most he has to say, though it is somewhat incomplete, given that most of the real problem with them lies in the eyes of their beholders, when they feel beholden to use it for more than it should be used for. In other words, though economist, statisticians, Central Bankers and even normal people seem to ignore that there is still life outside a normal and standardized consumption basket, and that life is driven by house prices in mid London, Dow Jones indexes, US$1900 original handbags and their US$20 counterfeits.

Any investor who now thinks that by beating the inflation he has made enough to keep him abreast, should be up for solid surprises, though admittedly of a quite different kind than those problems that could face the investors who have beaten inflation by a lot when the liquidity pools dry up and all the risk that have gone into their derivative hidings start to show up.