“Another example of a questionable statistical technique is the index number, the prime
means by which the government calculates inflation. The problem with index numbers is
that they obscure relative price changes between goods and industries, and relative price
changes are of prime importance. This is not to say the Consumer Price Index is irrelevant,
only that it is not a solid indicator, is subject to wide abuse, and masks highly complex price
movements between sectors.”
Index numbers are meant as an average of all increases in prices of a number of chosen goods. It’s meant to calculate the rate of general price inflation. What Rockwell is referring to is that it shifts focus from what actually matters - the effect of inflation on the prices of capital-goods relative to consumer-goods, which is what causes the business cycle.
First, the mainstream focuses purely on monetary aggregates and general changes in the price level. The mechanical view of the quantity theory assumes that changes in the money supply affect all incomes and prices, not only in the same direction, but also by the degree. The newly created sums are instantaneously dispersed around the entire economy via Ben Bernanke’s magic helicopter (according to the mainstream). Mises exploded this theory in the Theory of Money and Credit: general price changes are completely irrelevant if they were truly only “general .” The real problem with inflation is that it enters the economy in certain points and then permeates amongst the rest of society, causing relative and arbitrary misdirection’s of resources. Price Indicies cannot capture this process.
Also, index aggregation cannot differentiate between changes in the demand for money, or changes in the demand for the actual goods themselves. Prices may rise because there’s an increased demand for the goods, or because there was an expansion in the supply of money (or velocity of money).