Calculating BItcoin Inflation (or Deflation)

[RHorning]

The Wikipedia article on Bitcoin has a field which describes what the "annual inflation rate" of a currency is at.  It sort of got me thinking about what sorts of data could be used at least in terms of what the deflation rate of Bitcoin might be, either on a month to month basis or on an annual basis.

The problem here is mainly trying to find a "basket" of goods which can be used for comparison purposes and somehow "averaged" as a reasonable comparison to show the deflation.  About the only consistent transaction that has any sort of history is with the currency exchanges, but would that be a reasonable guide for such a calculation?  What other things ought to be included in calculating inflation?

There is the price point of a pizza being sold for 1000 BTC, which is an interesting benchmark for the value of a Bitcoin in regular use and is otherwise independent of other currency transactions.  Bidding Pond might be useful here too, although the problem there is the lack of consistency for common goods to be compared.

Perhaps the Bitcoin economy is still far too small.  If so, perhaps this is something that simply needs time to work on, but I think a discussion of potential benchmarks for calculating a figure would be useful.

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[Grant]

How much does a bigmac (or whatever standard consumer goods) accross the world, cost in bitcoins today ? (converted to USD at the current exchange rates)

Repeat exactly that same sample 3 months from now and you have the 3 month deflation/inflation.

[nanaimogold]

An ounce of gold?

A pound of coffee?

A long distance telephone call?

[FatherMcGruder]

Unfortunately, we can't yet buy with bitcoins most of the things we can with other currencies. I would think that the lack of choice would skew the significance of any coffee or webspace index.

I suppose the best index for any currency would be some type of sex index. What's money for, amiright?

EDIT: An interesting article on the topic: http://bigthink.com/ideas/23937

[RHorning]

How much does a bigmac (or whatever standard consumer goods) accross the world, cost in bitcoins today ? (converted to USD at the current exchange rates)

Repeat exactly that same sample 3 months from now and you have the 3 month deflation/inflation.

Essentially this is really just measuring the exchange rate itself, which isn't really an accurate measurement for a currency in terms of inflation.

BTW, the Big Mac index has been used as a way to compare currencies in other countries, as it is something which is fairly widespread (McDonald's restaurants can be found in many countries around the world) and are purchased by local consumers made with local labor and local resources.  Some variations are usually included as a beef hamburger is generally not sold in India, although there is a local equivalent made with other kinds of meat or as a vegetarian burger.

Unfortunately Big Macs, at the moment, aren't sold in bitcoins.  Give it time, particularly when employees might not mind getting paid in bitcoins instead of dollars or euros.

[mpkomara]

http://bitcointalk.org/index.php?topic=1658.0
big macs!

[Grant]

Essentially this is really just measuring the exchange rate itself, which isn't really an accurate measurement for a currency in terms of inflation.

IMHO that IS the most accurate measure of inflation, any other methods are just government propaganda. (the most important one in the government propaganda is to exclude the 2 most important commodities in their inflation measuring basket: food & energy).

There is this fine inflated article at wikipedia on inflation:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.[4]

I'm a simple minded logical person, i prefer to simplify and ask a conditional question:

If the above is true, then what is the core component at the root of inflation ?


I can today exchange bitcoins for RL cash and purchase whatever goods i want (to generate my CPI basket). To measure inflation, i do that again after a period of time and with that get the actual inflation. If my new purchasing power is weaker than the first it means we have inflation, otherwise we have deflation.

Inflation/deflation = change in exchange rate. Or to put it in streetlanguage, financial ability to exchange productivity for currency.

[mpkomara]

Inflation/deflation = change in exchange rate

So if USD/BTC increases but EUR/BTC decreases, does the bitcoin economy have inflation or deflation?  or both? or none?

[MoonShadow]

There is this fine inflated article at wikipedia on inflation:

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.

I'm a simple minded logical person, i prefer to simplify and ask a conditional question:

If the above is true,

The excerpt that I left above is not true.  This describes the most common effect of inflation, but is not inflation.  Inflation is the the expansion of the monetary base (including credit extended) relative to the economic activity that it represents.  Deflation is the exact opposite; the reduction of the monetary base relative to the economic activity that represents.  Notice that this is a raw ratio, not a unit, and change can come from either side of the fractional.  In the case of Bitcoin, even though the absolute monetary base is expanding at a rate of ~60% as expressed as an APR; the value of bitcoin is increasing (the ratio is increasing) because the economic activity is expanding at a higher overall rate than 60% per year.  Without running any numbers, the rise in the value of bitcoin suggests that the economic activity of the Bitcoin economy is increasing at a rate closer to 500% per year or more.

The general rise in prices seen over time, is an expression of that ratio filtering across industries, but make poor indicators themselves because they are 1) late, 2) uneven across industries and 3) offer no information with regard to root causes.

[MoonShadow]

Inflation/deflation = change in exchange rate

So if USD/BTC increases but EUR/BTC decreases, does the bitcoin economy have inflation or deflation?  or both? or none?

As I mentioned above, prices don't really offer information about the causes.  The above situation could happen without either inflation or deflation, although this would be corrected by actors seeking profit from arbitrige.  Prices tell you the answer, but not the question.