The fundamental problem with basket based inflation measures is if gas prices go up or down it's generally an identical good. If t-shirts quality declines the price may drop, but you may need to spend more money on t-shirts.
Sure computers may 'get better', but it's software we care about. If Word 2050 needs a X$ laptop then it does not matter how fast that laptop is it's still the same quality as the laptop running Word 2040.
Net result all inflation measures are off which is one reason so many things keep growing faster 'than inflation'.
If a t-shirt's quality declines, then it's actually getting more expensive, and that should be tracked.
If computers get better, then that should equally be tracked, otherwise you're introducing an asymmetry, where products get better -> price index doesn't change, but products get worse -> price index increases.
In fact, computers have rapidly gotten both better and cheaper over the last decades. A new 486DX2/66 machine ran around $2500 in 1992 -- now a basic desktop shouldn't run you more than $300-400.
First off, "The traditional CPI solution to this problem is to temporarily remove an item from the sample when its quality has changed." Lowering quality is one of the standard ways of dealing with rising production costs so this really does present a large bias.
> gotten both better and cheaper
last decades sure. Last five years somewhat. Next five years ehh, possibly.
But CPI is known to overstate inflation. The reason people think inflation is more than it is is simple - we've been trained from birth to notice prices going up, but not prices going down.
Price increases are bounded by substitution of goods and "what the traffic will bear."
The things - real estate, education, health care - that are inflating most rapidly are doing that because they are subsidized. When you subsidize a thing, it costs more and you get more of it
Ag subsidies are different because that's a sort of Nash equilibrium - the cost of inventory underruns exceeds the mild price increase from overproducing agricultural products.
Any many things have much lower inflation than the numbers show too. I'm reading The Rise and Fall of American Growth right now and one of the things that surprised me is that the same good sold in different ways has it's price tracked separately. So when department stores started offering lower prices than specialty stores that wasn't reflected in the inflation statistics.
Sure computers may 'get better', but it's software we care about. If Word 2050 needs a X$ laptop then it does not matter how fast that laptop is it's still the same quality as the laptop running Word 2040.
Net result all inflation measures are off which is one reason so many things keep growing faster 'than inflation'.