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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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Rise in quality causes inflation to be overstated

Quality improves over time, and adjusting for quality means consumers get more for less.

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Context

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The Argument

Many years ago, no one could have afforded large flat-panel TV screens, yet today they are standard in everyone’s homes. The largest TVs once cost thousands of dollars and today you can buy the equivalent for $100-200. This rise in quality is not accurately reflected in inflation indices. One study by MIT economist Jerry Hausman and U.S. Department of Agriculture economist Ephraim Leibtag concluded that ignoring outlet substitution increases grocery price inflation by 0.3 to 0.4 percentage points a year.[1] Adjusting for quality is what economists call “hedonic adjustments.”

Counter arguments

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Framing

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Premises

[P1] Quality of goods has skyrocketed, meaning consumers now get much more for their money. [P2] This is not accurately reflected by inflation indices.

Rejecting the premises

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Proponents

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Further Reading

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References

  1. http://www.nber.org/chapters/c5076

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This page was last edited on Monday, 27 Jan 2020 at 12:30 UTC