Measuring Inflation

There is a problem with measuring inflation as technological change continues to accelerate.  Andy Kessler at the WSJ gives us a couple of examples of the problem of measuring inflation over time when products didn’t exist at the start of the period. He uses the examples of automatic emergency breaking on cars and cell phones that were not available in the seventies.  He could have compared our 19 inch TV that weighted 80 pounds (a guess) and was called a portable.

He doesn’t tell us how he made the estimate but he has a reasonable argument that the Consumer Price Index (CPI) overstates inflation over a time frame that is long enough to encompass technological change.  He comes to an extreme answer:

Freezing today’s lifestyle and going backward, I estimate a “true” median income of $347 in 1973 against the $51,640 of 2016. Today’s middle class isn’t hollowed-out. It’s living high on the hog.

That’s right, Andy is telling us that income went up by 14,785% rather than down by 4%.   We need to see more data to be convinced that Andy is close but we remember the seventies.  Cell phones, Internet, tablets, and personal computers did not exist.  Vinyl is still great but we have more audio options now.  TV is incomprehensibly better on both our sets and the ability to record images.  The difference in watching sports on TV is astounding.  We think he is right about the direction of the adjustment if not the extent of it.

Sidebar: We have been reading Sue Grafton’s mystery series that start in 1982.  We are up to one published in 1993.  The heroine still has to use pay phones to communicate at critical times.  A brief review: The Kinsey Millhone series is like a TV show.  You must read them in order and you’ve got to get to J to be able to evaluate the series.  End Sidebar.

Andy is on to something on the CPI.  It is a big deal.  We make policy on it.  Is the middle class hollowed out?  We make payments like Social Security based on it.  We adjust tax brackets based on it.  We need some one handed economists.

 

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