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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?

Yes, inflation is understated Show more Show less

The government has a vested interest in inflation being understated, and the data it is based on it largely theoretical.
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Quality adjustments cause inflation to be understated

Quality adjustments may account for improvements in standards of living, but the consumer doesn’t pay lower prices.

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The Argument

Inflation indices reduce prices based on improvements in quality, even if these are not reflected in actual price. According to the U.S. inflation indices, TV prices have fallen 96% since 1996. While it is true that flat screen TVs are superior technologically to older TVs, the level of adjustment we see from 1996 to 2016 suggests TVs today are 4% the price of a TV in 1996. This is absurd; families that bought $400 TVs in 1996 do not now buy $16 TVs. Likewise, car prices in the U.S. have not risen in almost 20 years based on inflation indices, yet the average price for a car based on the MSRP (Manufacturer’s Suggested Retail Price) has steadily climbed for almost all categories of cars.[1] Quality is not a separable item from the good in question that consumers can take or leave. Consumers have to pay whatever the good costs today and cannot pay a theoretical price that accounts for improvement.

Counter arguments

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[P1] Inflation indices are adjusted for rising quality of good. [P2] This leads to understated inflation as inflation indices do not reflect the reality of what consumers pay.

Rejecting the premises

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This page was last edited on Monday, 27 Jan 2020 at 12:04 UTC