Inflation indices reduce prices based on improvements in quality, even if these are not reflected in actual price. According to the U.S. inflation indices, TV prices have fallen 96% since 1996. While it is true that flat screen TVs are superior technologically to older TVs, the level of adjustment we see from 1996 to 2016 suggests TVs today are 4% the price of a TV in 1996. This is absurd; families that bought $400 TVs in 1996 do not now buy $16 TVs. Likewise, car prices in the U.S. have not risen in almost 20 years based on inflation indices, yet the average price for a car based on the MSRP (Manufacturer’s Suggested Retail Price) has steadily climbed for almost all categories of cars. Quality is not a separable item from the good in question that consumers can take or leave. Consumers have to pay whatever the good costs today and cannot pay a theoretical price that accounts for improvement.
[P1] Inflation indices are adjusted for rising quality of good. [P2] This leads to understated inflation as inflation indices do not reflect the reality of what consumers pay.