The CPI

Professor Mason Gaffney of UC-Riverside has a short essay out suggesting that the Consumer Price Index (CPI) understates actual inflation. This runs completely counter to the assumption of most economists that the CPI overstates inflation.

This is an important issue because so many things are driven by the CPI (COLAs for instance) and because it is used by politicians to measure economic performance - e.g., growth in real wages.

Gaffney first makes a fairly compelling argument why government would seek to understate inflation. Then, he goes on to suggest how they did it. The principal method was to undercount the cost of housing.

First was removing the costs of buying and owning homes from the CPI. The Bureau of Labor Statistics (BLS), the agency that calculates the CPI, did this from 1983 onwards. They didn’t remove it altogether, that would have been too transparent. Instead they substituted the “rental equivalent” of housing. This is supposed to be what your house would rent for, or what you would pay to rent a similar house. It is a hypothetical and casual figure - sloppy and unverifiable, that is - based simply on questionnaires to a sample of homeowners. It takes no account of the fact that some people will, and therefore everyone must pay a premium to own, because of expected higher future rents and resale values.

Thus the land boom of 1983-89 was mostly blanked out of the official published CPI of those years. The CPI rose gently as though the land boom never happened. Again, in 2004 housing prices rose by 13%, while these “rental equivalents” rose only by 2%.

He then goes on to debunk many of the arguments made by those believing the CPI overstates inflation. Among those are the suggestion that product improvements are not accounted for. Here are some of his counter-examples:

Let’s just take point “b”, above, quality improvement bias. The texts give some examples, but not a single counter-example. Here are a few of the latter.

• 2x4 dimensional lumber is no longer 2x4, but 15-20% smaller in cross-section, and of lower grade stock

• salmon is no longer wild, but farm raised in unsanitary conditions, and died pink (ugh)

• “wooden” furniture is now mostly particle-board

• “wooden” doors are now mostly hollow

• new houses have remote locations, far from desired destinations

• ice cream is now filled out with seaweed products

• the steel in autos is eked out with fiberglass, plastic, and other ersatz that crumbles in minor collisions

• airline travel is no longer a delight but a series of insults and abuses

• gasoline used to come with free services: pumping the gas, checking tire pressure and supplying free air, checking oil and water, cleaning glass, free maps, rest rooms (often clean), mechanic on duty, friendly attitudes and travel directions. They served you before you paid. Stations were easy to find, to enter and exit. Competing firms wanted your business: now most of them have merged.

• cold fresh milk was delivered to your door

• clerks in grocery and other stores brought your orders to the counter; now, many clerks, if you can find one, can hardly direct you to the right aisle

• suits came with two pairs of pants and they fitted the cuffs free. Waists came in half-sizes

• socks came in a full range of sizes

• shoes came in a full range of widths; the clerk patiently fitted the fussiest of customers

• the post office delivered mail and parcels to your door or RFD, often twice a day

• public telephones were everywhere, not just in airport lobbies. Information was free; live operators actually conversed with you, and might give you street addresses

• public transit service was frequent, and served many routes now abandoned

• live people used to answer commercial telephones, and tell you what you actually wanted to know

• autos used to buy “freedom of the road”; now they buy long commutes at low speeds and rage-inducing delays. One must now travel farther and buck more traffic to reach the same number of destinations. Boskin et al. dwell on higher performance of cars, and the bells and whistles, but take no note of the cost-push of urban sprawl.

• classes keep getting larger, with less access to teachers and top professors, and more use of mind-numbing “scantron” testing.

• before world war II, an Ivy-league college student lodged in a roomy dorm with maid service and dined in a student union with table service, and a nutritionist planning healthy meals. All that, plus tuition and incidentals, cost under $1,000 a year. Now, to maintain your children’s place and status in the rat race, you’d put out $40,000 a year for a claustrophobic dorm and junk food. But a B.A. no longer has the former value and cachet. Now you need time in graduate and professional schools to achieve the same status. Many students emerge with huge student loan balances to pay off over life.

• warranties on major appliances cost extra, aren’t promptly honored, and expire too soon. Repair services and fix-it shops used to abound to maintain smaller appliances. Now, most of them are throwaway.

• replacement parts for autos are hard to find, exploitively overpriced, and are often ersatz or recycled aftermarket parts

• musical instruments are mass-produced and tinny instead of hand-crafted and signed

• piano keys were ivory; now plastic

• many new “wonder drugs”, if you can afford them, have bad side-effects, while old aspirin still gets the highest marks