Is inflation understated?

Rise in quality causes inflation to be overstated

Question: Is inflation understated?
Position1 of 3›: No, inflation is overstated
Argument‹2 of 3›: Rise in quality causes inflation to be overstated

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

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. Adjusting for quality is what economists call “hedonic adjustments.”

Premises

[P1]Products like flat-panel TVs have improved enormously in quality while their prices have collapsed, from thousands of dollars to $100–200. [P2] Inflation indices do not accurately capture this rise in quality. [P3] Studies by economists like Hausman and Leibtag found that ignoring such factors overstates measured inflation by several tenths of a percentage point a year. [C] Therefore, because the rise in quality causes inflation to be overstated, inflation is not understated.

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.