Most economists know that the CPI is overestimated and therefore prefer the PCE price index. However, monthly CPI data is consistently released before PCE data for a given month. One would think that they move in the same direction and be highly correlated. Indeed, in the past five years, the correlation is 0.96. Therefore, it stands to reason that the there is less new relevant information on the PCE release dates than on the CPI release dates. Yes, CPI is biased, but it still contains some information about prices and it is known well prior to the more accurate PCE numbers.
Supply and Demand react to new information. Sometimes the new information changes our expectations about the future, and other times we learn that our beliefs about goods and assets were previously not quite right. So, with new relevant information comes new prices as people update their beliefs and expectations.
Let’s get financial.
Previously, I wrote about the paralysis that a vegetarian would face if confronted with a broad view of production inputs. Namely, that hunting Cecil the lion was part of the dentist’s maintenance of his own labor. Given that preferences are diverse, we’re all perpetually facing a similar dilemma: If we trade with someone, then we are definitely, 100% helping them to do immoral things with which we disagree.
After a good night’s rest, I awoke and realized an age-old tool that humans have used to address the issue. As humans, we care and know most about those people who are closest to us. My previous analysis took as given that all of the relevant information concerning our trade partners was available. However, as Stigler knew well, information is a good and it’s costly to obtain.
When you know that your local lawyer is also a drug-dealer and a lecher, you don’t employ his services. Of course, your moral taste dictates a boycott as appropriate because his actions would be aided by your cooperative trade. The information about his divergent moral preferences is cheap and easy to obtain.