On Jan 20, 2008, at 2:47 PM, Andy F wrote:
> Could any economists comment on whether the CPI is bogus? I'm
> referring to its supposedly underestimating inflation due to
> substitutions (steak/hamburger), hedonic tweaking, figuring increasing
> home computer power offsets cost of health care, that kind of thing.
There's a difference between "bogus" and "has some problems" - kinda like the difference between "crisis" and "trouble." Part of the problem is that it's not easy to represent "the cost of living" in a a single index (and the BLS says that the CPI is not meant as a cost of living index anyway). Maybe they make too much of substitution (the classic example is chicken for beef - but if someone really prefers beef to chicken they're not perfect substitutes). Hedonic pricing is a challenge too - yes, today's $1000 computer is twice as powerful as 2005's, but how much does that matter? It matters if you do video editing; it doesn't matter if all you're doing is using Eudora to send emails. Figuring out how to weigh housing in the CPI is really hard too; you want to capture the housing bubble, sure, but if people aren't moving, or if they live in Detroit, then house prices don't matter all that much to them. The CPI may understate inflation by a point or so, and almost all the revisions and suggested revisions have been in the direction of lowering reported inflation, but it's far from "bogus." Especially over the short term.
Doug