[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

The second major problem is “quality adjustment.” New products, which both
offer new functions and better perform the existing functions of older products,
constantly enter the market. To compare the prices of the new products with the
old, some quality adjustment must be made. If the price goes up by 10 percent but
the new product lasts longer and works better, then in a real sense the price
increase is less than 10 percent and may even represent a price reduction.
Sometimes, the quality adjustments are easy; one machine can do what two
machines did before. But usually the comparisons are difficult. If we measure the
quality of computers by calculations per second, memory, and disk storage, the
rate of decrease in computer prices is phenomenal. But even this does not fully
reflect their improvements in quality. We can do things with the computer now
that were unimaginable twenty-five years ago at any price. And how do we determine
the relative value of a new drug that cures a previously incurable disease?
The Bureau of Labor Statistics tries to make adjustments for quality. But the
consensus is that these adjustments are imperfect and result in an overestimate
in the inflation rate of anywhere between a few tenths of a percentage point to
more than 1 percent.
The third problem is technical, having to do with the way the data are collected
and the details of the calculations.
Many economists believe that the recent revisions will not fully eliminate the
CPI bias. They argue that as a result, Social Security and taxes should be indexed
to the CPI rate of inflation minus 1 or 0.5 percent.
ALTERNATIVE MEASURES OF INFLATION
The CPI provides one measure of inflation, based on what the average consumer
buys. Other price indexes can be calculated using different market baskets. One
different measure of prices is the producer price index, which measures the
average level of prices of goods sold by producers. This index is useful because
it gives us an idea of what will happen to consumer prices in the near future.
Usually, if producers are receiving higher prices from their sales to wholesalers,
eventually retailers will have to charge higher prices. These will be reflected in a
higher CPI.
Internet Connection
THE INFLATION CALCULATOR
The Bureau of Labor Statistics has a handy inflation calculator
that allows you to find out how much it costs today to purchase
goods that cost $100 in some earlier year. For example,
it takes $731 today to purchase goods you could have bought for
$100 in 1949. Try it out at www.bls.gov/cpi/home.htm.
MEASURING INFLATION ∂ 517