CPI Overstates Inflation Even More than We Thought
By David Henderson
Using a new dataset on e-commerce transactions in many categories of goods from Adobe Analytics, we calculated matched-model inflation and explored the importance of new products. Combining the two, the true Adobe DPI inflation rate — adjusted for new goods — was more than 3 percentage points per year lower than the CPI inflation rate for the same categories from 2014–2017.
This is the conclusion of a new NBER study by University of Chicago economist Austan Goolsbee, former chairman of the Council of Economic Advisers under President Obama and Pete Klenow, an economist at Stanford University. The study is “Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce,” NBER Working Paper #24649, May 2018. It is, unfortunately, gated.
Note that they compared the inflation rates for the same categories, which are a subset of the items measured in the CPI. So we should be somewhat cautious in generalizing from this subset. Still, it is a good bet that the CPI overstates inflation even more than the 0.8 percentage points that Stanford economist Michael Boskin found in “Consumer Price Indexes,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.