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Problems With China's Consumer Price Index

Wednesday, 12 January 2011 06:10

The NYT reported that China's consumer price index (CPI) understates inflation because it includes an outdated set of goods and services. It is worth noting that this has been a reason that many economists have argued that the CPI in the United States overstates inflation.

The prices of new goods and services tend to fall rapidly in the first year or two that they appear on the market (think of CD players or cell phones). If these sharp price declines are not included in a price index then it is likely to overstate the true rate of inflation.

Comments (2)Add Comment
written by skeptonomist, January 12, 2011 8:27
Do price indices take adequate account of item longevity? If it becomes necessary to replace an item more frequently the cost to consumers increases. Any error here would seem to underestimate consumer cost. Obsolescence in electronic and communication items is probably the dominant reason for replacement nowadays. How does this affect savings rates?
Stupid Liberals Understate Economic Welfare With Bad Price Indexes
written by izzatzo, January 12, 2011 10:57
This is very true. As Karl Marx and Adam Smith said, technology leads everything else in free markets - also a contemporary corporate mantra. High initial prices are necessary to induce first movers and first adopters to begin the next wave of creative destruction of the last wave of obsolete technology.

As conservative economists never fail to emphasize, efficiency gains of emerging technology drives socialism. For example, after the technology of electricity and household appliances freed up household labor, women became hard core communists and started competing with men for jobs.

The next time conservatives invoke claims of improved welfare from technological advances, remind them that every time they make this argument, they're undermining their own case for impending destruction of the economy by hyperinflation not offset by explosions in productivity.

If only those early price indices had not included the initial high prices of electric washing machines, then the resulting inflation would not have caused the Great Depression, and if iPhone prices don't reflect the new killer app WashWhileWearingIt in the price index, hyperinflation doomsday will once again be denied its imminent appearance by stupid liberals.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.