A price index is a normalized average of prices for goods and services within an economy over a given period of time. The best known is the Consumer Price Index (CPI).
The general price level is a hypothetical measure of overall prices of goods and services in an economy over time, normalized relative to some base set. The general price level is approximated with the Daily Consumer Price Index (Daily CPI).
During low inflation consumer goods and most other prices, including salaries, wages, rents, transport fees, government-administered prices, electricity prices, water, gas, etc., are generally updated once a year in terms of the change in annual inflation. However, the general price level, in fact, changes at least DAILY. This only becomes evident during LOW inflation when a product is actually priced in terms of the CPI when it is bought and sold on a daily basis and thus has to be priced on a daily basis in terms of the DAILY CPI. This happens daily in the global US Dollar 3 Trillion government capital inflation-indexed bond market in many countries where these sovereign bonds have a different price every day in low and high inflation economies set in terms of the DAILY CPI. This is obviously also true for inflation-indexed bonds during high inflation, hyperinflation and deflation.
During hyperinflation consumer prices are generally updated daily, actually every time the parallel rate changes, in terms of the US Dollar black market rate. Everyone in a hyperinflationary economy knows for a fact that the general price level changes daily (or even more often) as consumer prices are adjusted daily, i.e., every time the US Dollar parallel rate changes. At levels of hyperinflation above 1000 percent per annum, everyone in the economy knows that the previous day´s price is meaningless the next day: it has to be updated at least daily in terms of the change in the black market rate. Everyone involved in business and money matters in a hyperinflationary economy with hyperinflation above 1000 percent per annum knows the general price level changes at least daily.
All DAILY US Dollar parallel market rates around the world in high and hyperinflationary countries are proxies for the DAILY general price level in those countries as far as the updating of consumer, property and many other prices are concerned. This excludes consumer prices fixed by the government, for example, currently in Venezuela.
The general price level is indicated by a DAILY Non-Monetary Index that follows ALL changes in the general level of prices, normally at least DAILY changes. It is represented by the Daily CPI during low inflation, high inflation, the initial stage of hyperinflation and deflation.
The general price level is indicated by the DAILY US Dollar parallel rate as from the stage of hyperinflation when the Daily CPI falls too far behind the Daily USD parallel rate. The DAILY real (parallel or black market) foreign exchange rate is then used as a proxy for the general price level. The daily price level as represented by the DAILY US Dollar parallel rate can change more than once per day by a huge percentage during severe hyperinflation. See Hyperinflation in Zimbabwe, Hungary, Yugoslavia and Germany.
All countries that issue government capital inflation-indexed bonds already calculate a Daily CPI. These bonds trade DAILY. They are priced DAILY in terms of the DAILY CPI.
Here are links to some Daily CPIs which indicate the DAILY general price levels in the respective countries:
Chile - UF: Daily Unidad de Fomento Index. Not a Daily CPI, but a monetized daily indexed unit of account based on the CPI.
- Venezuela - Today´s Rate USD parallel rate
More countries that issue daily inflation-indexed bonds and thus already calculate a Daily CPI to price these bonds daily are:
France, Canada, Australia, Germany, Greece, Honk Kong, Italy, India, Japan, Sweden, Portugal, South Africa and Brazil.
The constant purchasing power of capital and all other constant real value non-monetary items, e.g., salaries, wages, rent, taxes, trade debtors, trade creditors, all non-monetary payables, all non-monetary receivables, all profits and losses, all items in shareholders equity, etc. can only be maintained constant in real value in terms of a DAILY INDEX during low inflation, high inflation, hyperinflation and deflation.
Nicolaas Smith
Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Entrepreneurs should follow the general price level to not dictate the market.
ReplyDeleteExpatriate Tax Services,
ReplyDeleteThank you for your comment. Can you give a little more detail? Who is dictating the market? Or who or what would not dictate the market?