Shift in what is relevant to the CPI

The argument

On this view the Consumer Price Index tracks the changing cost of a basket of goods but says nothing about what those goods do for the people who buy them, and it is that gap which makes measured inflation too high rather than too low. Many things that were once a substantial part of the Consumer Price Index are no longer relevant in the way they were, because modern technologies have absorbed them. The smartphone is the standard illustration. A single device now performs, at no additional cost, several functions that once represented a big part of the index. Taking a photograph, processing it and printing it was a recurring household expense; it is now essentially free. Calling was extremely expensive twenty to thirty years ago, whereas Skype provides unlimited video calling for free. GPS navigation systems provide a hands-free, real-time alternative to maps. In each case the service households actually consume has not disappeared or deteriorated; it has become both better and cheaper, and in some cases the separate purchase has dropped out of the basket altogether. Economists call the resulting benefit consumer surplus: the consumer benefits and spends less money doing so. The measurement problem proponents identify is that an index built to follow prices has no natural way of booking a gain that arrives as a price falling to nothing, or as one device quietly absorbing what were several separate purchases. Where a good becomes free rather than merely cheaper, it tends to leave the index rather than register a fall within it, so the improvement in what households get for their money goes unrecorded. This inability of the CPI to pick up such gains to consumers means that the figure it reports overstates the rate at which the real cost of living is rising, and that inflation is overstated rather than understated.

Premises

Counter-arguments

The premise that these gains go uncaptured describes a practice statistical agencies do not follow. The consumer price index is not a fixed basket carried forward from the past: its contents and weights are revised regularly, with obsolete items withdrawn and new ones introduced — film processing and standalone satellite-navigation devices have been removed from national baskets, smartphones and streaming subscriptions added. Goods that ceased to be relevant do not sit in the index inflating the measured rate, because they are taken out. Quality improvement is handled too, through hedonic adjustment: where a product's specification improves, the price change is decomposed so that the improvement is not counted as inflation. This is applied most aggressively in exactly the categories the argument names — computing, telecommunications, consumer electronics — and the standing criticism of the technique is that it is applied too readily, understating measured inflation rather than overstating it. Whether the adjustment is adequate is a genuine dispute; that it does not happen is not. There is also a conceptual problem with the argument's central move. Consumer surplus is by definition value the consumer does not pay for. A price index measures the changing cost of a basket, and an index that credited unpaid-for benefit would no longer be measuring prices — it would be measuring welfare, which is a different instrument for a different purpose. Excluding surplus is a design decision, not an oversight. Finally, the selection runs one way. Quality change moves in both directions, and the categories that dominate household budgets — housing, healthcare, insurance, childcare, education — have risen faster than the headline index. Choosing the goods that became cheaper and inferring overstatement is the exact mirror of the sibling position's method, and neither selection settles the question.

Rejecting the premises

[Rejecting P1] The basket is not fixed: contents and weights are revised regularly, with obsolete items withdrawn and new ones introduced, so goods that ceased to be relevant are not left in the index as the premise assumes. [Rejecting P2] Quality improvement is already handled through hedonic adjustment, applied most aggressively in the very categories named, and the standing criticism is that it understates rather than overstates measured inflation. Consumer surplus is also by definition value not paid for, so it is not a price and does not belong in a price index.