Double-Digit Inflation Bet with Bob Murphy

Why don’t you adjust the payout for the change in CPI?

There's some interesting personal irony to your post: A professor of mine I was having a conversation with recently predicted that the inflation will really start taking hold in 2013 or 2014. We really didn't get into it on justifications for the date, but I'm rather sure it's because he expects recovery to be very slow.

It would be unfortunate for someone to have to lose a bet and still be correct.

If the two events are equally likely to happen, then Bob has the advantage. You should have specified that the amount paid would be equal to whatever the present value of a $500 payment on 1/1/13 evaluated on the date of payment.

You'd have to agree on a discount rate, of course. Using CPI or treasuries (which somewhat track CPI, among other variables) might be a good start.

Or, to make matters simple, the bet could have been settled on 1/1/13. But of course you and Caplan know this; this just shows the supreme confidence you have in your position.

What is it with the low inflation guys and seasonally adjusted CPI year over year change?

Surely Mr Henderson has the upper hand here? Nominal $500 is worth less after a bout of 10% p.a. inflation surely?

I guess I'm impressed that you included the "nonsense" CPI (you just can't get through a post without at least a gentle poke in someone's eye, can you? You either understand why it's not always nonsense, or we shouldn't bother reading you) which makes it a lot more likely you'll have to pay up.

I'd be more impressed if you bet a more substantial amount of money -- or possibly included some sort of prescribed public embarrassment/admission of being wrong in addition to the payoff.

The comments on this post are a carbon copy of Prof Caplan's post. Mr. Arbon, they somewhat adjust for CPI by making the bet payable to Mr. Murphy as soon as a yearly CPI of 10% or more is observed. If anything, Mr. Henderson is at a disadvantage because he has to wait till the end of the betting period to be paid. Say, inflation where an average of 4% for the next 3 years, at the end of 2013; $500 would be worth $443.37. Now suppose in 2010 inflation hit 10%. Mr. Murphy would be paid at the end of 2010; $500 would be worth $450. I would calculuate FV for all three years, and do an average, but I think my point is pretty clear. The difference in inflation rates are countered by the payout schedule.

Tom,

I'm sure you will hear about the results of the bet on this very blog, and over at Mises (Murphy still blogs there yes?). Likewise, core CPI is nonsense CPI. It is used to make models more stable/clean, but nobody thinks it actually represents the total increase in consumer spending prices.

"nonsense" CPI

Gee, Doctor, after all these years of teaching at the Naval PG School, I'd have thought you'd be able to find a more imaginative modifier than that! I'll be glad to help!

I'm Bob Murphy, and I approve this blog post.