Many years ago, no one could have afforded large flat-panel TV screens, yet today they are standard in everyone’s homes. The largest TVs once cost thousands of dollars and today you can buy the equivalent for $100-200. This rise in quality is not accurately reflected in inflation indices. One study by MIT economist Jerry Hausman and U.S. Department of Agriculture economist Ephraim Leibtag concluded that ignoring outlet substitution increases grocery price inflation by 0.3 to 0.4 percentage points a year. Adjusting for quality is what economists call “hedonic adjustments.”
[P1] Quality of goods has skyrocketed, meaning consumers now get much more for their money. [P2] This is not accurately reflected by inflation indices.