How Technological Advances Impact Inflation as Measured by CPI

In 1973, my family got its first color television -- a 19" Zenith -- for around $300. The picture was small, the color a bit faded, and there was no remote control. Now you can buy a 42" HD Smart TV for $250. Not only has the price declined, but the quality has significantly improved.

The somewhat controversial Consumer Price Index (CPI) considers two factors in determining the changes in the cost of goods and services. The simple part is the change in price. The cost of a haircut, for example, has risen over time (offset, of course, by a growth in wages). This is fairly easy to track.

But the CPI number also makes hedonic adjustments, which means taking into account quality improvements that occur over time. A new Honda Accord may cost a lot more than it did in 1990, but it also has many more features than its predecessor did. The hard part is determining how much of the increased price relates to the multiple innovations made over the decades.

To dig deeper into the implications of this concept, I recommend two excellent articles, which can be found here and here.

The main takeaway is that the CPI is not purely a measure of changes to the cost of living, but an attempt to show how the price of goods and services move over time as adjusted for technological advancements.

Words of Wisdom

Lest you think that questioning the advances of technology is a modern phenomenon, Henry David Thoreau (1817 - 1862) wrote that people "have become the tools of their tools."