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Is inflation understated? Show more Show less

The Consumer Price Index is a measure of the change in prices consumers pay for different goods over time, and is often used as a benchmark for inflation. However, the inflation levels it suggests are not without controversy, and are often accused of being over- or understated. So what is the truth? And why would it be either?

No, inflation is overstated Show more Show less

Various biases cause inflation to be continually overstated.
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Shift in what is relevant to the CPI

Technological change means that many things we used to pay for are now free.

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The Argument

Many things that were once a part of the Consumer Price Index are no longer relevant due to modern technologies. If you consider a smart phone, it can now do many things that represented a big part of the CPI in the past. For example, taking a photograph, processing it and printing it, is now essentially free. Likewise, while calling was extremely expensive twenty to thirty years ago, Skype now provides unlimited video calling for free. GPS navigation systems provide a hands-free, real-time alternative to maps. Economists call this “consumer surplus”. The consumer benefits and spends less money. This inability for the CPI to pick up on these gains to consumers means that inflation may be overstated.

Counter arguments

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[P1] The CPI does not pick up on the consumer surplus caused by the internet. [P2] This leads to overstating of inflation, as it does not reflect the money saved by consumers.

Rejecting the premises

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This page was last edited on Monday, 27 Jan 2020 at 12:25 UTC