Style and the CPI

by Will Wilkinson on March 28, 2005

Virginia Postrel has a nice little piece on hotel rooms and the problem of setting up the CPI. I am quite sure that the CPI overestimates inflation, underestimates real wages, and that the gap between the methodologically “correct” CPI and the actually existing CPI is growing at an ever accelerating rate. Before coming to Washington, and getting all interested in policy. I had no idea what a profound impact a bunch of statisticians down at the BLS have on all our lives. These technical methodological matters mean more than most people know. Although she doesn’t come right out and say so (when she writes, “If . . . guests care as much about aesthetics as hoteliers believe they do, it would be irresponsible to treat the $15 as a true price increase,” I think I can hear the antecedent affirmed between the lines”), Virginia’s saying that the CPI just can’t get a grip on increases in value due to “intangibles,” and so overestimates the price of hotels rooms and underestimates the worth of the money in your pocket.

The concluding sentence is nice:

Measuring inflation, [BLS guy] acknowledges, “is more of an art than a science, unfortunately.”

Which is to say, value-laden and contestable.

  • Jeff Lonsdale
    Granted, Bill Gross can be ridiculous. I think he's half right a lot of the time, which has been good enough for him. I don't think all hedonic adjustments are insidious and substitution effects shouldn't be taken into account, but at the very least the method the BLS uses for measuring the cost of computers leads to an understatement of inflation.
    If people are consuming higher quality goods at higher prices, the cost of living has gone up, even if their quality of life has gone up as well. I'm not sure one index can accurately reflect both whether consumers are still getting their money's worth and the cost of living at the same time. Even if the wish was an accurate portrayal of the cost of living, one index wouldn't work as things such as medical, housing, and college expenses factor differently into different stages of people's lives.

    Value-laden and contestable... yet we still need to try and make heads or tails of what the government statistics are actually saying.
  • Will Wilkinson
    Jeff, the CPI is basically how we measure the cost of living. If it is overestimating inflation, then it cannot at the same time be underestimating the cost of living.

    Gross seems not to know what he is talking about. He seems to take the pre-Boskin CPI as some kind holy writ defining the elusive really real rate of inflation and thus any deviation is a kind of flim flammery. His exclamation against substitution, for instance, reveals some shoddy habits of economic reasoning.
  • Jeff Lonsdale
    Bill Gross has another point of view on these hedonic adjustments, and how most of the recent ones are politically motivated.

    http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2004/IO_Oct_2004.htm

    Even if it were granted that the CPI is overestimating inflation because there aren't enough of these hedonic adjustments, they are still underestimating the increased costs of living.
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