Economist: The CPI Has Inherent Flaws, Dow/Gold Ratio Is the True Inflation Benchmark

FX168 Finance News, September 25—— Mises Institute economist Vasilii Sapozhnikov believes that there are inherent flaws in the artificial adjustments of the CPI, making it difficult to reflect real inflation. He suggests that the Dow Jones Index to gold price ratio is a more reliable benchmark. Measured by gold, the real market value of US stocks has shrunk by about one-third in the past two and a half years. New credit first pushes up asset prices such as stocks and real estate, while the CPI only captures lagging price changes on the consumer end. Based on historical patterns, he predicts that the current Dow/gold ratio may fall to 0.5 ounces by 2030, and this hypothesis also has a falsifiable testing standard.

As a core reference indicator for investment decision-making and monetary policy, the Consumer Price Index (CPI) has long been regarded as a benchmark for measuring inflation. However, Mises Institute economist Vasilii Sapozhnikov suggests that the design of this indicator is biased, data is outdated and prone to mislead, while the Dow Jones Industrial Average to gold price ratio is a reliable alternative measure.

CPI Has Inherent Underlying Flaws; the Benchmark Is Not Objective

In a recent analytical article, Vasilii Sapozhnikov wrote that the US Bureau of Labor Statistics released data on August 12, showing a 0.1% month-over-month increase in the July CPI, and a 3.4% year-over-year gain, a slight 0.1 percentage point drop from June. The market generally interpreted this data as proof that inflation indicators are running normally.

He believes this statistical system Sapozhnikov states, and this assumption is not a simple technical detail but the core logic of the entire indicator.

In addition, the CPI’s statistical criteria continuously adjust weights and calculation methods. For example, in January 1983, the US Bureau of Labor Statistics stopped directly tracking the sales prices of owner-occupied homes, replacing it with owners’ equivalent rent estimates for homeowners. In 1996, the Boskin Commission determined that the CPI overestimated inflation by about 1.1 percentage points annually, after which statistical agencies adopted geometric averaging, continuously expanded the scope of quality adjustments, and product upgrades directly reduced the rate of price increases. He emphasizes that he is not accusing anyone of falsifying data, just noting a pattern: every major revision in the last forty years has led to a lower measured inflation value, while social security, tax brackets, and indexed debt adjustments all rely on this inflation data. In the July data, housing contributed two-thirds of the monthly inflation increase, yet the largest component of the housing index is not real rent transactions, but the estimated imputed rent of owner-occupied property.

The Dow/Gold Ratio Is More Fair, Not Subject to Artificial Adjustment

Sapozhnikov claims that gold does not have these artificial adjustment issues; there are no committees modifying the statistical approach, no need for seasonal adjustments, annual weight updates, or historical data revisions. While the value of gold itself is not constant, there are no institutions defining its pricing rules—an ounce of gold in 1932 and an ounce now are identical in essence.

On August 17, the Dow Jones Industrial Average closed at 53,459.78 points, close to a historical high, with gold prices at around $4,400 per ounce; the Dow amounts to about 12 ounces of gold. At the beginning of 2024, the Dow was worth about 19 ounces of gold. He points out that in US dollar terms, the stock market keeps hitting new nominal highs, but converted to gold, the real value of US stocks has shrunk by about one-third in just two and a half years. Both statements are true—they simply use different units of measure. The critical information in monetary economics lies in the difference between the two data sets.

Looking back, extreme values of the Dow/gold ratio often coincide with major market turning points. In September 1929, the ratio was about 18 ounces; by July 1932, only 2 ounces. In February 1966, the ratio was 28; in 1980, it fell to 1. In August 1999, it surpassed 40, a historical peak, and in 2011, it dropped to 6 ounces. Between 2011 and 2024, the ratio remained range-bound at historically high levels until February 2024, when the range was broken, and the ratio slid from 19 to the present 12.

Credit Inflates Asset Prices First, CPI Can Only Capture the Final Signal

Sapozhnikov explains, Gold does not represent the liabilities of any institution; it is steady during booms and gets repriced when bubbles burst. The Dow/gold ratio can simultaneously reflect the credit cycle and the trend of capital flight into safe havens.

He also provides a falsifiable forecast: the complete historical cycle lows follow a roughly linear pattern—about 2 ounces in 1932 and 1 ounce in 1980, a halving every half-century. Based on this, the current cycle may bottom around 2030, with the Dow/gold ratio possibly falling to 0.5 ounces. Sapozhnikov states that if the ratio rebounds from 12, surpassing the all-time high of 40 in 1999 before ever falling to the single digits, then his theory will be completely disproven.

Conclusion

In summary, the official CPI data can only present results within the given statistical framework, making it difficult to reflect the US dollar’s real purchasing power. To observe true changes in the value of the monetary benchmark, it is necessary to use a reference that is free from artificial revisions. The Dow/gold ratio provides a new perspective for observing currency cycles and real inflation.