The quality-adjusted rate of price inflation is much higher than measured

Higher ed on Zoom, fear of going to the hospital, and long lines at the DMV bring us to one part of my latest Bloomberg column:

Education, health care and government are pretty big parts of our economy. If you add on the lower quality of restaurant visits, reduced sports performances (your ESPN cable package is worth less), and an inability to take preferred vacations and trips, you have many more negative quality adjustments that don’t show up in measured rates of inflation.


The Bureau of Labor Statistics, the Bureau of Economic Analysis, the Fed and other institutions have declined to make formal adjustments for these changes in the real standard of living. That is the politically practical way to proceed, if not the technically correct decision.

Inflation measures work best when the consumption bundle is roughly stable over short periods of time, and that just hasn’t been the case this year. Because so many government payments depends on rates of indexation, debating “the true degree of inflation” this year would become an unending political football, with all the major institutions involved, including the Fed, losing credibility. (Just exactly how much worse is that Zoom lecture?) Besides, implicit price inflation from restricted opportunities probably should, for purposes of policy and benefits indexation, be treated differently than price inflation resulting from more expensive food and rent.

One implication is that, at least for the time being, price inflation rules just aren’t that meaningful any more:

…price rules and other forms of inflation rules don’t really work in times of pandemic. The very measurement of price inflation becomes arbitrary, and dependent on inertial measurement conventions from normal times, so the numbers don’t have enough actual economic meaning to guide policy.

There is more at the link.


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