01 Oct 2012

Different Kinds of CPI Bias

Economics, Inflation 42 Comments

I am happy anytime GMU professors argue with each other, so I liked this recent post from Bryan Caplan:

An argument I’ve repeatedly had with Tyler Cowen:

Tyler: We’re stagnating!

Bryan:
No we’re not.  You’re ignoring massive CPI bias.  We live in an age ofconsumption-biased technological change.  Official numbers don’t adequately adjust for quality improvements, and utterly ignore the mountains of free stuff we keep receiving.

Tyler: How massive?

Bryan:
Oh…  Say 1 percentage-point per year.

Tyler: You’re crazy.

I’m hoping EconLog readers can help us resolve our impasse.  How?  By keeping atime diary for a day or two.  For every waking hour of the day, ask yourself:

1. Was my experience during the last hour noticeably better as a result of an innovation introduced from 1990-present? [Yes/No]

2. Was my experience during the last hour noticeably better as a result of an innovation introduced from 1950-1989? [Yes/No]

Ideally you’ll record your judgments as you go, but chronologically reviewing your day hour-by-hour is a reasonable substitute.

Once you’re done, code “yes”=1 and “no”=0.  Then calculate your average scores, and report them on quicksurveys.

My predictions, assuming I get at least 100 responses:

1. The median response for question #1 will be at least .15.

2. The median response for question #2 will be no more than three times as high as the median response for question #1.

Feel free to share your general thoughts in the comments, but please post your results exclusively on the survey page.

P.S. To broaden the sample, please blog, Like, Tweet, etc.

I have a few problems with this:

(1) As people in Bryan’s comments pointed out, he’s certainly not getting a representative sample, by asking people to blog, Like, Tweet, etc. If Bryan were having an argument with a supporter of Che, it would hardly be fair to settle it by asking EconLog readers what they thought of the guy.

(2) Yet there’s another bias in his approach, that nobody (thus far) has mentioned in the comments. Bryan is asking people to think about innovations that have improved someone’s life. It seems Bryan thinks he’s giving the stagnation hypothesis an equal shake by allowing for a “no” answer, but that’s not the only mechanism here. One could agree that there have been innovations since 1950, 1990, etc. that made my life better from 10am – 11am today, while also agreeing that there have been changes since 2008 that have made my life worse. Yet Bryan’s approach doesn’t capture the negative changes; he doesn’t even ask about them. So of course the median replies are going to be positive, and perhaps significantly so.

This isn’t merely hypothetical. When people keep telling me that the CPI numbers show there’s no inflation problem, I think they are taking those BLS numbers way too seriously. Now I haven’t been stressing this point, because it would look like I was making excuses for why my own warnings about price inflation have missed the mark, and I don’t want to be “that guy.”

But seriously: I am not just trying to fit in with the whiners when I say that going to the grocery store, I am stunned at how much they hit me up for at the register when all I did was get enough stuff for the next 3 days. So I think part of what has happened is that packaging is a similar price as before, but less volume of product. You would think that surely the BLS number-crunchers would catch all this and adjust, but that’s only if you think people in government agencies don’t respond to incentives to fudge things a certain way that their bosses want. I’m not even saying they consciously lie, rather I’m saying there’s all sorts of knobs you can turn on the “hedonic adjustments” etc. to make the answer come out a certain way.

Another example: There is a Chinese restaurant that I used to go to a lot, but then I stopped because their waiters were terrible. But then I broke down and went back to them again, after at least a 6-month hiatus. I am not exaggerating, the amount of food they brought in the General Tso’s chicken was at most 75% of the previous serving, and it could have been as low as 60%. Yet they charged roughly the same price, as far as I can remember. I would be stunned if the BLS catches stuff like that.

Or how about this: We have already talked about (in a point originally noticed by Silas Barta) that the cardboard for cereal boxes is thinner than it used to be. And the paper towels and toilet paper are awful. I doubt the BLS catches that change in quality.

Or how about this: I think one way grocery stores have adapted, is a shift to more self-service checkouts and fewer employees at any given time. (Presumably the minimum wage increase has something to do with this too.) So it’s not merely that it’s more expensive to get your week’s groceries (such that you may end up going twice a week rather than once), but now you scan and bag your own stuff. And heaven forbid if you are in the store at an odd hour and want to find something; there’s no employee in the same ZIP code. No way in the world the BLS is counting that kind of thing.

42 Responses to “Different Kinds of CPI Bias”

  1. Christopher says:

    So, do you have any suggestions on how to account for the things you are describing or are you saying that calculating CPI is not possible all together.

    • Silas Barta says:

      In order to truly account for these things, they would need to have Consumer-Reports-like labs that track the changes in product/packaging composition over time by objective metrics. Or they could find some kind of good that can’t be debased and for which supply and demand are steady — say, patent-expired OTC medicine?

      As a

      OTOH, I do agree that some products certainly have gotten better, and, say, the Web has produced tremendous benefits for people that aren’t capture in conventional econometrics. But as pertains to price, you have to separate out a) tech-improvement-based changes (usually toward lower prices) vs b)money supply/velocity-based changes (usually up) and c) commodity-shock based price shifts.

      The Fed should care about b), but not a) or c), and so it shouldn’t count “better iPads” against pricier necessities. (And it *certainly* shouldn’t count a twice-as-fast iPad as being equivalent to 2 iPads, because there’s no way it can actually service the same needs that two of the old iPads did.) Yes, that’s an actual example of where they’ve found deflation…

      Btw, thanks Bob, for spelling out your thoughts on this issue, which closely parallel mine, and which also haven’t gotten a wide enough hearing.

      • Matt Tanous says:

        “Or they could find some kind of good that can’t be debased and for which supply and demand are steady — say, patent-expired OTC medicine?”

        Medicine can easily be debased by lowering the strength or replacing with cheaper and less effective drugs. Sometimes, this is even mandated by law, such as the (un)PATRIOT Act’s provisions pulling the effective part of medicines like Sudafed out to be replaced with a weaker, but cheaper, drug – to ostensibly stop meth production (which is a drug you can get a prescription for if you have adult ADHD…..)

  2. Steve Horwitz says:

    Bob,

    The CPI does adjust for changes in the size of packaging, as I found out when Brad DeLong called me the “stupidest man alive” for raising exactly this point. Now whether it adjusts for your Chinese restaurant example is an interesting question. See my CP post here: http://www.coordinationproblem.org/2010/07/are-we-suffering-from-concealed-inflation.html

    Just be ready to join the Stupidest Man Alive club.

    • Bob Murphy says:

      Oh Steve, I am sure they officially claim to adjust, I just don’t trust them to do it correctly. If DeLong calls me out, I’ll say he’s the Naivest Man Alive.

      • Brent says:

        No kidding. The Soviets measured GDP… The Post Office says it tries to be cost conscious… My congressman says he voted for more responsible government… The girlfriend says she doesn’t mind if there are strippers… And the BLS says it adjusts for everything. I guess it is all true. No one ever lies or hacks. Never.

        • Matt Tanous says:

          The Soviets measured GDP very accurately. It was just something like 95% government spending, and only 0.001% production of stuff that people needed.

          • Brent says:

            That’s the point. Even if they don’t lie, the fact that what they are doing is meaningless is, well, an important fact.

            • Silas Barta says:

              And if Daniel_Kuehn is around, he’s roll is eyes and lecture you that people *knew* that the numbers were meaningless all along and that obviously no one would interpret GDP to be indicative of welfare, would they?

    • joeftansey says:

      The switch to GMO Round-Up oranges is probably not captured and would be difficult to quantify anyway.

  3. Blackadder says:

    A while back Krugman noted that a subscription to ShadowStats (which claims we’ve been experiencing 8-10% inflation) hasn’t gone up at all in six years. At the time I thought this was a telling point.

    Now, however, I realize there is an alternative explanation, e.g., that the quality of ShadowStats analysis has gone down.

    • Richard Moss says:

      I am surprised you would think it possible its quality could get worse.

      I think Bob beginning to soften you up…

      • Blackadder says:

        I am surprised you would think it possible its quality could get worse.

        In terms of accuracy, probably not. But he could be using fewer words, words with fewer letters, simpler sentence structure, etc. The important thing is that if you notice a couple of instances of that sort of thing that means it’s pervasive.

        • Richard Moss says:

          Right…like if he consistently started to leave out words like ‘is’ where it is clearly called for…

        • Bob Murphy says:

          The important thing is that if you notice a couple of instances of that sort of thing that means it’s pervasive.

          Oh, before I thought you were just being “funny.” Now I see you’re actually being an ass.

          • Blackadder says:

            Bob,

            I apologize for being an ass.

            Let me try to make the same point in a non-snarky way. Trying to gauge inflation based on one’s personal assessment of quality changes is methodologically questionable. It’s too easy to fool yourself into thinking you see a pattern when you may just be recalling isolated incidents. And trying to translate your own personal experience to the broader society is equally questionable (FWIW, I haven’t noticed any big quality changes in my meals, etc.).

            • Silas Barta says:

              But if you’re *noticing* several decreases in quality, and the BLS also isn’t making in *upward* adjustments in effective prices due to product *debasement*, you have significant basis for claiming the numbers are skewed, since they’re only looking at one side of a phenomenon.

            • Bob Murphy says:

              BA, well I probably shouldn’t have used such strong terminology. But it’s not like I’m going to the store with a chip on my shoulder. I’ll be minding my own business, thinking about something else, and then I get shocked at how much the final tab is, so that I have to look over the receipt to see if there was a mistake.

              I have seen lots of examples in the field of climate change of how government agencies come up with whatever numbers they need, to justify the policy. I just can’t believe how many free-market people are snarkily saying, “Where’s the inflation, idjits? BLS says you’re wrong.”

              • Blackadder says:

                Bob,

                If it were just a matter of relying on the BLS that would be one thing. But there are also private price indexes (e.g. the Billion Prices Project) that show the same thing.

                I would think that, from a free-market perspective, quality-based hidden inflation arguments ought to be suspect. If businesses really could get away with reducing portion sizes or quality to save money, wouldn’t they have done it a long time ago? Aren’t businesses supposed to compete on quality as well as price?

              • Bob Murphy says:

                If it were just a matter of relying on the BLS that would be one thing. But there are also private price indexes (e.g. the Billion Prices Project) that show the same thing.

                OK I shouldn’t have been so snarky about the BLS. I haven’t done enough research on the BPP to know how I feel about it. All I’m saying is, I don’t buy a billion things. I buy food, gasoline, health insurance, phone service, and toiler paper–and they have all gotten more expensive since January 2009.

                I would think that, from a free-market perspective, quality-based hidden inflation arguments ought to be suspect. If businesses really could get away with reducing portion sizes or quality to save money, wouldn’t they have done it a long time ago? Aren’t businesses supposed to compete on quality as well as price?

                You know commodity prices are way up right? Retailers are getting squeezed. Their input prices are way up, but their final customers are either unemployed or really worried about it.

                If the government levies a new tax on crude oil, I would expect gasoline to go up in price. “But Bob, if the gasoline sellers could raise prices, why didn’t they already do it? Don’t you believe in the market?” See the problem?

              • Silas Barta says:

                Oh wow, Blackadder, that’s neat, how does the Billion Price Index handle product debasements?

              • Blackadder says:

                All I’m saying is, I don’t buy a billion things. I buy food, gasoline, health insurance, phone service, and toiler paper–and they have all gotten more expensive since January 2009.

                Suppose that the price of veggies goes up while the price of meat declines a corresponding amount. If I am a vegetarian, that is going to really suck for me because the prices of items I buy has gone up, whereas the stuff that’s gone down in price is stuff I don’t buy. I don’t deny that sometimes life can suck like that.

                What I would object to, though, is if the vegetarian starts blaming his predicament on Bernanke’s dollar debasement strategy. Inflation is a property of the price level as a whole, not of the price of individual items.

                You know commodity prices are way up right?

                Way up since the market bottom? Sure. That’s to be expected. Way up since the pre-crash peak? Not so much.

                It’s true that an increase in the cost to business can alter the profit-maximization strategy of firms. But why would this end up expressing itself so uniformly in quality reductions?

                If you look at the BPP, it has data on lots of different countries. For some countries the BPP inflation rate is much much higher than the official government numbers. Is there a reason why in Argentina businesses would respond to inflation pressures by raising prices whereas in the U.S. they would respond by watering down the orange juice?

              • Bharat says:

                If you look at the BPP, it has data on lots of different countries. For some countries the BPP inflation rate is much much higher than the official government numbers. Is there a reason why in Argentina businesses would respond to inflation pressures by raising prices whereas in the U.S. they would respond by watering down the orange juice?

                Well, of course, different individuals have different value scales due a number of different reasons. Culture, geography, religion, genetics, etc. Perhaps Argentinians view coconut juice as a near substitute to orange juice and will switch to it if quality is reduced, but wouldn’t switch if there was a price increase instead.

                Different firms will deal with inflation in different ways depending on their products and depending on how they believe their customers will react.

                There is such a highly subjective nature to all of this that I really don’t find it extraordinary at all if price level indicators have strong biases one way or the other.

                Suppose that the price of veggies goes up while the price of meat declines a corresponding amount. If I am a vegetarian, that is going to really suck for me because the prices of items I buy has gone up, whereas the stuff that’s gone down in price is stuff I don’t buy. I don’t deny that sometimes life can suck like that.

                What I would object to, though, is if the vegetarian starts blaming his predicament on Bernanke’s dollar debasement strategy. Inflation is a property of the price level as a whole, not of the price of individual items.

                Although money supply inflation is a universal phenomena, price inflation is not, because price inflation deals with counterfactuals. Perhaps the vegetarians are correct and the prices of vegetarian foods would be decreasing had Bernanke not been printing money. Perhaps meat prices also would be decreasing even more.

              • Bharat says:

                Just to clarify, when I say universal, I don’t mean to ignore relative price changes due to inflation. But I guess it’s possible Blackadder is ignoring it himself.

    • Matt Tanous says:

      It’s only a telling point if you nonsensically believe that there is some mythical price level that rises or falls as a unit. Which Krugman might believe, of course, seeing as how he doesn’t understand the broken window fallacy, either.

      • Blackadder says:

        Am I the only one who finds it ironic that Matt Tanous and Scott Sumner agree about the meaninglessness of inflation?

        • Matt Tanous says:

          I don’t know. Are you the only one who equates a disdain for price “levels” and “indices” as a belief that inflation is meaningless? Because they are not the same thing. I’d point you to virtually anything on the subject by, say, Murray Rothbard, but something tells me you won’t understand that either.

  4. Bharat says:

    More examples that they certainly don’t take into account unless they actually eat these products:

    I’ve always loved Oatmeal Creme Pies, but only buy them occasionally because of how fatty they seem. Regardless, I bought a box around 6 months ago, and the cookies were the same size as ever. My friend bought a box recently, the packaging was the same, and I’d venture to say the price was the same (perhaps even higher), but the cookies themselves were noticeably smaller. ‘Noticeably’ as in at least 3/4 the size.

    Another example was these ready-made tacquitos I used to get from Publix. A year or two ago, the amount of meat in them drastically decreased. Prices keep increasing. Again, packaging from the outside is the same, with no news of the decreased meat in the actual tacquitos. The size and look of the tacquitos are the same as well, and it would take someone to actually eat the tacquitos to figure out that it has less meat than before.

    Hidden inflation is extremely common.

    • Matt Tanous says:

      I noticed that about two years ago, those Oatmeal Creme Pies were noticeably less tasty as well. Still good, but not quite up to their previous level of deliciousness.

  5. Robert Fellner says:

    The American Institute for Economic Research has created their own measure, The Everyday Price Index (EPI) which had price inflation at 8% for 2011 and currently has 2012 price inflation at 2.3%

    https://www.aier.org/article/7557-epi-reflects-basic-economic-change

    • Blackadder says:

      From the linked article:

      There are several possible reasons for the divergence of the two indices that came about in the early 2000s. Rapid technological change restrained prices of products, especially those related to information technology. Quality-adjusted prices for mobile phones, personal computers, and televisions fell or increased much more slowly than prices of other consumer goods and services. The same was true for household appliances and even cars. At the same time, increasing globalization and reduction in trade restrictions drove down prices of apparel and other imported goods.

      These prices, which are included in the CPI, helped restrain growth in the overall cost of living. But the prices are for products AIER deliberately excludes from the EPI.

      Unsurprisingly, if you deliberately exclude items with low or negative price growth from your price index, this will tend to increase the index’s “inflation” rate.

      • Matt Tanous says:

        “Unsurprisingly, if you deliberately exclude items with [high] or [positive] price growth from your price index, this will tend to [decrease] the [CPI]’s “inflation” rate.”

        Which might be why the CPI weights healthcare at 6.513 (according to the BLS) while it accounts for a double digit chunk of GDP (something like 16%, IIRC).

      • Robert Fellner says:

        It’s pretty weird to cut off the quote before their explanation as to why. You can go disagree with their reasoning, but you shouldn’t deliberately omit it.

        “But the prices are for products AIER deliberately excludes from the EPI. The price-reducing force of technological improvements and globalization does not restrain prices of everyday purchases quite as much as it does for less frequently purchased items. Toothpaste ain’t so high-tech.”

        In regards to formulating an Everyday Price Index, ignoring once a year type purchases seems pretty reasonable.

        • Blackadder says:

          It’s pretty weird to cut off the quote before their explanation as to why.

          The rational for not including those items wasn’t relevant.

          In regards to formulating an Everyday Price Index, ignoring once a year type purchases seems pretty reasonable.

          How often do you make a car payment?

          • Robert Fellner says:

            It’s extremely relevant to your false statement that:

            if you deliberately exclude items with low or negative price growth from your price index

            Which is evidently absurd based on the fact that there are several factors with low and negative price growth in their index.

            I would not have omitted car prices if I was the AIER. If you think that omission makes it an unreliable index for routine purchases, that’s a fine position to hold.

            To claim the index deliberately excludes cars due to its low rate of price growth is absurd on its face.

  6. Blackadder says:

    Btw, while we’re on the subject of cars, I recently bought one for my wife. When we did the financing, the interest rate on the loan ended up being less than 2%.

    For those who think the CPI is massively understating inflation: why would the dealership want to charge me a negative interest rate?

    • Major_Freedom says:

      Car dealers, and most lenders, don’t lend at a rate that takes into account inflation as textbook pedagogical models would predict.

      Your car dealer is probably going to resell the loan to some TBTF bank that can borrow at LESS than the rate on the car loan, thus locking in a profit on buying the car loan (provided of course you pay it back, but then who cares, because if the TBTF bank incurs a loss, they can just borrow more at virtually zero percent). The cost of the negative real interest rate is being spread across “society” through the Fed’s destruction of the dollar. All those who hold and accept dollars and own dollar denominated assets are taking the punishment.

      You are assuming a rather outdated model of the economy dude. We are in uncharted territory now. The old way is done. The old thinking has to be jettisoned.

      Just look at the 10 year treasury. Its current yield is 1.65%. Ask your same question: “Why would treasury investors accept a rate that seemingly earns them a negative real interest rate?” The answer is that the Fed is buying those securities, so investors resell the 10 years to the Fed to lock in a profit.

      I submit that we’re in the mother of all bond bubbles, BA. Did you refinance your house yet? When the bond bubble bursts, it’s going to make 2008 look like “the good times.”

    • Bob Murphy says:

      For those who think the CPI is massively understating inflation: why would the dealership want to charge me a negative interest rate?

      Blackadder, do you know TIPS yields are currently negative on 5 through 20-year maturities? But when it comes to slapping those knucklehead Austrians upside the head, no argument is beneath Blackadder.

      • Blackadder says:

        Bob,

        Surely there is a difference between the interest rate on U.S. government debt and the interest rates on car loans, right?

        I’m not saying that massively negative real interest rates on car loans are theoretically impossible, just as it’s not theoretically impossible to have massive inflation expressed through quality degradation rather than higher prices. But why go through all these contortions to avoid the seemingly obvious conclusion that inflation is actually low?

        • Robert Fellner says:

          So when one interest rate hurts your argument it is “different” and evidence of “going through all these contortions to avoid the seemingly obvious conclusion” while the one that helps you does not elicit these responses.

          Boy I’m so eager to engage you further!

          Also Major Freedom specifically addressed your question on car loans, which you have totally ignored.

          • Blackadder says:

            So when one interest rate hurts your argument it is “different”

            If the real inflation rate was something like 8% then the real rate of return on government bonds wouldn’t just be slightly negative; it would be hugely negative, which would itself be pretty weird.

            Also Major Freedom specifically addressed your question on car loans, which you have totally ignored.

            Experience has taught me that it’s best to just ignore Major Freedom.

      • Blackadder says:

        when it comes to slapping those knucklehead Austrians upside the head, no argument is beneath Blackadder.

        When the strongest arguments for a proposition have failed to convince someone, you can either give up or move on to weaker arguments. That is true regardless of whether the fault lies with the arguments or with the person who is not convinced by them.

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