Sally: “Congratulations on your new job! You must be excited!”
Sam: “Thanks. Yes, it is very exciting.”
Sally: “So, what exactly will you be doing?”
Sam: “Well, I’m sort of the hidden power behind the scenes.”
Sally: “Really? Sounds intriguing. What’s your title?”
Sam: “My official title is Chief Psychologist of the Federal Reserve.”
Sally: “Wow. That’s a mouthful.”
Sam: “It’s usually abbreviated CPFR, but most people just call me Cypher.”
Sally: “What does the job entail?”
Sam: “Well, my task is to help people understand that the Federal Reserve’s view of the economy is the correct one. That our predictions are flawless. That our policy decisions are based on sound economics, not political expediency. And most importantly, that any real, objective observations in the actual economy that conflict with our pronouncements are illusory. They’re simply distortions caused by imperfect measurements, or transitory fluctuations.”
Sally: “Hmm. So, if I understand you correctly, the goal is to convince people to ignore what is happening under their own noses, and to go with your interpretation of reality, even if it conflicts with their day-to-day experience?”
Sam: “Exactly. My job is to help our citizens understand that when housing prices appear to be spiking, in reality things are not that dire. A more accurate view is revealed by survey results of what we call ‘owners equivalent rent’. Similarly, while car prices may appear to be increasing dramatically, that’s also a mere illusion. In reality, they have hardly increased at all, when you take into account hedonic quality adjustments.”
Sally: “Wait a minute. Prices for homes are through the roof! Same with car prices! Shortages are everywhere, and prices are going up by the week!”
Sam: “Rest assured that most of what you see is not what it seems. A lot of these increases are due to a distorted view of reality. My job is to help people understand the underlying truth.”
Sally: “Well, all I know is that the car I bought six years ago is no longer affordable. If I wanted a new one, it would be almost double the price!”
Sam: “Not really. You see, the new car is not the same as the old car. The new car has many novel features and improvements that make it more valuable. In essence, the price has actually been quite stable. In some cases, it might have even gone down.”
Sally: “What? The same model I bought six years ago now costs double, and you’re telling me the price actually went down? And what use are all these new gadgets, if I can’t afford to buy the new car because it’s doubled in price! And who decided to add all these new features? Certainly not me!”
Sam: “Even so, the new price needs to be adjusted to account for the quality improvements. Accurate comparison is our goal.”
Sally: “And you’re able to convince people of this nonsense?”
Sam: “Well, not directly. The hedonic quality adjustments and owners’ equivalent rent are incorporated into the Consumer Price Index or CPI. That’s what’s reported in the newspapers.”
Sally: “Wow, that explains a lot. I always wondered how the reported CPI can be so low when real inflation is actually so much higher.”
Sam: “No, no. You actually have it backwards. The reality is the CPI. If you want, we can schedule a private psychological consultation to help you grasp the truth.”
Sally: “Gee. Thanks. That would be great! These skyrocketing prices have really stressed me out. Wow, I can see how your role is really important. No wonder you’re the hidden power behind the scenes. Haha, you’re like that guy behind the curtain in the Wizard of Oz, huh?”
Sam: “Indeed. Let’s get your appointment scheduled, and then you’ll see the light.”