Replacement Costs and Inflation Accounting: A Demurrer

The enthusiasm for using replacement costs in current value accounting stems in part from a conviction that businessmen have no interest in general price level changes. But although firms do have different purchasing patterns, they do not hold different kinds of money; changes in the general price level measure the impact of inflation on both money and money-fixed claims.

Replacement prices can only indicate how much general purchasing power a particular firm will not have if it replaces particular assets at something like current prices. Replacement prices, unlike selling prices, can never measure an asset’s actual purchasing power. For this reason, replacement price data are rarely helpful to outside users.