- Question
Is inflation understated?
The Consumer Price Index is a measure of the change in prices consumers pay for different goods over time. This index is often used as a benchmark for inflation. However, the inflation levels the Consumer Price Index suggests are not without controversy. Often inflation is accused of being overstated or understated. So what is the truth? And why would it be either?
No, inflation is overstated
This position holds that, far from being understated, inflation is overstated. It argues that measurement biases inflate the figure — improvements in product quality, shifts in what is relevant to the CPI, and a 'fixed basket' that no longer reflects what people actually buy.
Yes, inflation is understated
This position holds that inflation is understated. It argues governments have a vested interest in low headline figures, that the underlying data is largely theoretical, that quality adjustments mask real price rises, and that official indices fail to reflect everyday reality.
Inflation is accurate, but ignores varying demand elasticity among its components
The fastest-inflating components of CPI are demand inelastic. You can delay or decline a TV purchase, but not a hospital stay. Demand-inelastic items therefore consume an ever larger proportion of the consumer budget. This is most noticeable to lower-income consumers, who perceive a creeping loss of financial control, even if their total spending is growing only slowly.