The Consumer Price Index is a measure of the change in prices consumers pay for different goods over time. This index is often used as a benchmark for inflation. However, the inflation levels the Consumer Price Index suggests are not without controversy. Often inflation is accused of being overstated or understated. So what is the truth? And why would it be either?
No, inflation is overstatedShow moreShow less
Various biases cause inflation to be continually overstated.
Many things that were once a part of the Consumer Price Index are no longer relevant due to modern technologies.
If you consider a smart phone, it can now do many things that represented a big part of the CPI in the past. For example, taking a photograph, processing it and printing it, is now essentially free. Likewise, while calling was extremely expensive twenty to thirty years ago, Skype now provides unlimited video calling for free. GPS navigation systems provide a hands-free, real-time alternative to maps.
Economists call this “consumer surplus”. The consumer benefits and spends less money. This inability for the CPI to pick up on these gains to consumers means that inflation may be overstated.
[P1] The CPI does not pick up on the consumer surplus caused by the internet.
[P2] This leads to overstating of inflation, as it does not reflect the money saved by consumers.