May 21, 2016
Max Ehrenfreund had an interesting column reporting on research that showed the prices of goods purchased by higher income households fell more rapidly than the prices of goods purchased by lower income households. The basic argument is that new goods introduced into the market tend to be targeted towards higher end households. These new goods put downward pressure on the prices of the older goods with which they are competing. Since these are goods disproportionately purchased by higher end households (e.g. craft beers), it means the goods they consume rise less rapidly in price.
This story is actually not new. Two decades ago there was an effort to reduce Social Security by claiming that the consumer price index (CPI) overstates the true rate of inflation. (Social Security benefits are indexed to the CPI after workers retire.) One of the main arguments for an overstatement was that the new goods that were declining rapidly in price often did not enter the CPI basket until after their most rapid period of price decline. The poster child for this argument was the cell phone, which didn’t get into the index due to a fluke until 1998, when almost half of all households owned a cell phone. (Due to changes in procedures, this sort of mistake is virtually impossible with the current methodology.)
However, with the cell phone and other new items, the first purchasers who would enjoy these large price declines would be overwhelmingly high end individuals. The new goods argument might be a compelling case that the CPI overstates the rate of inflation experienced by the wealthy, but the story is much less plausible for the less well off segment of the population. The failure to include the cell phone in the CPI did not lead to any overstatement whatsoever in the rate of inflation experienced by the half of the population that didn’t own a cell phone, as some of us tried to point out at the time.
There are likely to be continuing battles over the rate of inflation experienced by different groups. There has been some research arguing that the poor actually see a lower rate of inflation than wealthy households. (See Shawn Fremstad’s analysis here.) Many elite types, like the Washington Post editorial board, continue to argue that Social Security should be cut because the CPI overstates the true rate of inflation. Unfortunately, all of these people oppose constructing an elderly CPI that would determine the extent to which this claim is true. Anyhow, it is apparently much easier to cut benefits for people by changing the measurements than by actually voting directly for benefit cuts, so look for many more battles over the measurement of inflation in the years ahead.
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