Rise in quality causes inflation to be overstated

The argument

The claim is that price indices track what things cost far better than they track what is being bought, and that the gap between the two pushes measured inflation up rather than down. The example given is the television. Many years ago no one could have afforded a large flat-panel screen, and the largest sets cost thousands of dollars; today they are standard in everyone's homes and the equivalent can be bought for $100–200. Read purely as a price movement, that is a steep fall. But price is only half of it, because the set now sold cheaply is also a far better set than the expensive one it replaced. This is where the indices are said to fall short. An index follows the cost of a basket over time, which requires treating this year's item as the same item as last year's. Where quality has risen, that assumption quietly understates how much a buyer now gets for the money, and the improvement registers as nothing at all rather than as an effective price cut. Economists have a name for the correction: hedonic adjustment, the practice of adjusting measured prices for changes in the quality of the goods themselves. To the extent the adjustment is incomplete, the published figure runs above the true change in the cost of living. Related measurement problems are said to run the same way. One study by MIT economist Jerry Hausman and U.S. Department of Agriculture economist Ephraim Leibtag concluded that ignoring outlet substitution increases measured grocery price inflation by 0.3 to 0.4 percentage points a year. The general lesson proponents draw from such findings is that the known flaws in the indices are flaws of overstatement rather than understatement, so the honest conclusion is that inflation is overstated.

Premises

Counter-arguments

Critics reply that flat-screen TVs are a cherry-picked category with unusually rapid, quality-driven deflation, unrepresentative of a basket dominated by housing, healthcare and education — all of which have risen sharply. One deflating category doesn't show the overall index is overstated. They add that hedonic adjustment cuts both ways and can *understate* felt inflation: consumers often cannot buy the older, cheaper version, so a quality gain they are forced to pay for is counted as a price drop. And the outlet-substitution study cited assumes shoppers willingly trade down, which critics argue masks real cost-of-living increases rather than proving inflation is exaggerated.

Rejecting the premises

[Rejecting P1] The flat-screen TV is a cherry-picked category with unusually rapid quality-driven deflation; it doesn't represent the basket, where housing, healthcare and education have risen sharply. [Rejecting P2] Hedonic adjustment cuts both ways and can understate felt inflation — consumers often can't buy the older, cheaper version, so a quality gain they must pay for is counted as a price drop. [Rejecting P3] The cited outlet-substitution study assumes consumers willingly trade down, which critics argue masks real cost-of-living increases rather than proving inflation is overstated.