I recently voiced fear of coming inflation. Yet on reflection, high inflation is already here. While measured inflation remains low, I’ve been arguing for years that CPI bias heavily distorts official measures. My point has always been that official measures of inflation are too high, because official measures fail to properly account for rising quality and variety of goods. In the last month, however, all this has suddenly reversed. Due to the coronavirus, official measures of inflation are now much too low.
How so? Most obviously, the variety of available goods has sharply fallen. Roughly half the products I normally buy are no longer on the shelves. I’m hardly starving, but I’ve had to fill my shopping basket with a lot of goods I would not buy under ordinary conditions. After many years of claiming that product variety is a great unmeasured gift, consistency compels me to admit that the loss of product variety is a great unmeasured shock in the other direction.
Variety aside, the quality of goods has also plummeted. Most notably, shopping convenience is way down. Back in February, I could pop into any store, swiftly pinpoint what I wanted, and buy as much as I liked without worrying about infection. No longer. Today’s best-case scenario is that I pay the same amount as last month for a greatly degraded shopping experience. The actual physical quality of the goods has fallen too; I now have to settle for half-crushed bread, worse cuts of salmon, and so on.
Can’t I solve some of these problems by switching to delivery? Yes, but that highlights yet another source of hidden inflation: outlet bias. During the last few decades, consumers have heavily switched to innovative stores like CostCo that provide high-quality products for low prices. Official CPI measures have failed to properly account for this transformation. In the last few weeks, however, we’ve had outlet bias in reverse. Stores like CostCo have been so congested (and rationed!) that many people have switched over to higher-cost, lower-quality stores they would normally avoid.
This includes delivery services like Instacart. While I’m grateful they’re in business, Wegmans food delivered via Instacart easily costs 30% more than I’d normally pay. The list prices are higher, there’s a delivery fee, and don’t forget the tip. True, I don’t have to go to the store, but back in the good old days of February, I liked going to the store. (I enjoy getting out on weekend mornings, and waiting around the house for deliveries is a drag). Upshot: I really am paying 30% more to shop at an outlet that is inferior to what used to be available. And I’m hardly alone.
The optimist in me says that this drastic sign-flip for CPI bias is temporary. Yet since supply chains – especially international chains – have been seriously disrupted, much of the degradation in the quality and variety of goods that I’ve described will soon be replaced with other degradations. You can hardly wax rhapsodic about the cheap and handy products China sells us without lamenting the many months we will have to go without.
I am well-aware that gasoline and a few other goods have suddenly gotten cheaper. Yet overall, we have endured a rude shock. In normal times, CPI bias means that we fail to appreciate our high and rising prosperity. During this crisis, CPI bias means that we fail to appreciate how much we’ve lost.
Here’s to better times!
P.S. In case you don’t know me well, this is no April Fool’s joke…
READER COMMENTS
Atanu Dey
Apr 1 2020 at 11:42am
Bryan:
It’s Costco, not CostCo. 🙂
Ricardo
Apr 1 2020 at 11:46am
You know the CPI takes outlets into account, right? Admittedly with a lag — it takes a while to get the data from Census, which performs data collection for BLS’s Consumer Expenditure Survey — but the CPI sample is weighted to reflect actual consumer behavior, including the outlets consumers choose.
Scott Sumner
Apr 1 2020 at 1:18pm
There is no “true” CPI, because inflation has never been clearly defined. My CPI just fell sharply.
Mark Bahner
Apr 2 2020 at 8:28pm
I don’t know if anyone has considered this, but if one has a swimming pool, there hasn’t been a better time in many years to replace the water with gasoline.
😉
Thaomas
Apr 1 2020 at 2:58pm
Yours is not the experience of bond traders. The break-even CPI spread of TIPS indicates expectations of inflation of less than 1% for the next ten years.
Robert EV
Apr 1 2020 at 6:37pm
Bond traders are not average consumers. Their personal CPI may vary from the average CPI.
SG
Apr 2 2020 at 11:22am
Personal CPI of bond-traders has nothing to do with it. Thaomas’s point is that bond prices are forecasting an *economy-wide* decline in inflation. Bryan’s anecdote is emphasizing the supply shock (which is real, and which will increase some prices) but when viewing the economy as a whole the demand shock is much, much bigger. That implies that the correct policy response would be to further ease monetary policy.
Now, Bryan might not like it because that means that his cost of living will continue to rise, but the economy would be much better off if aggregate demand were stabilized.
Michael Pettengill
Apr 2 2020 at 3:15pm
A 2500 sq-ft house that cost $200,000 three decades ago is more valuable today at $600,000 because it is now 7500 sq-ft?
Or is it more value today because paying to buy it requires two full time adults who have no time for kids so the sq-ft per person has gone up from 500 to 1250 sq-ft per person, plus the time spent in the house together further increases the average to 1500-2000 alone time per sq-ft?
But what is the calculation for those who would have lived in a shack in rural America with a dug well and hand pump, and outhouse on the other side of the shack, who are now trying to live in a box in a city with the same job access as three decades ago in rural America which has far less opportunity today?
Food and clothing, etc., are a small portion of living costs. The majority is for capital which has inflated in price with little added value for people in the bottom half of consumers by income. For many families a working car is a necessity today but costs as much as a house decades ago when a car was not needed for many because jobs, shopping, school was a walk or public transit away.
With rising inequality, the “surplus” in value is only experienced by half the population while the other half can no longer afford the old inferior by today’s standards goods and services because the capital goods extract higher rents for lower value delivered.
Kaleberg
Apr 2 2020 at 11:44pm
While it isn’t part of the CPI, for most people it is the largest single cost in their cost of living, it will be interesting to see how landlords and banks deal with people unable to pay their rent or mortgage. Having to settle for unsalted peanuts and having to add salt or not getting one’s favorite brand of radicchio is small potatoes in comparison.
Joseph Lamps
Apr 3 2020 at 6:58am
A dollar is only worth less right now if you plan to spend it soon though, right? So CPI hasn’t really jumped much if most of your money is savings that you don’t plan to spend until things go back to normal
Cleve Schenck
Apr 18 2020 at 9:00am
Let’s move our view from at the micro climate of small examples. To really forecast where the CPI and inflation are heading we need to look at the big picture. The CPI and inflation are based on the money supply relative to the amount of goods and services that are available to purchase with that money. The large drop in the stock market and other asset classes have and will take a lot of potential money out of that equation. Monetary and fiscal policy will seek to correct that. The question is will the Federal Reserve and the Federal Government get it right? The jury is still out on that, although I am not optimistic. Only time will tell how this all plays out and what the real trajectory of inflation and the CPI will be. I do agree with the author that the CPI index is flawed in its calculations to suit what the Federal Government would like us to believe. A statistics professor of mine in college would repeatedly say “Statistics don’t lie, people do”.
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