Friday, August 28, 2020

Why Price Inflation Indexes Are More Fake Than Ever

Tyler Cowen makes some interesting points in his Bloomberg column:
The most obvious effect of the pandemic is often better understood by the public than by professional economists: It has been an inflationary time, but not in the traditional manner.
The measured numbers indicate deflationary pressures, but that is misleading. In times of crisis, any measured inflation rate becomes much less meaningful as an economic indicator.
Let’s take education, which many American students have been doing online or not receiving much of at all. Whether for K-12 or at the university level, the cost of getting a quality education this year has risen drastically (think private tutors) — and for many individuals it may be impossible altogether. We are seeing deteriorating quality, and thus much higher real prices, yet this does not show up as either a quality adjustment or a price increase in standard calculations.
Or consider health care. For months, Americans were afraid to visit hospital facilities, for fear of contracting Covid-19. The perceived cost of the hospital visit was thus much higher, in terms of anxiety and medical risk, even if the sticker price or reimbursement rate for heart surgery hasn’t budged.
In many parts of the country, the lines at the motor vehicle offices are much longer, or it is much more time-consuming to get your car inspected for state approval. That is mostly due to pent-up demand from the worst months of the pandemic...
Education, health care and government are pretty big parts of our economy. If you add on the lower quality of restaurant visits, reduced sports performances (your ESPN cable package is worth less), and an inability to take preferred vacations and trips, you have many more negative quality adjustments that don’t show up in measured rates of inflation.
The Bureau of Labor Statistics, the Bureau of Economic Analysis, the Fed and other institutions have declined to make formal adjustments for these changes in the real standard of living... 
Inflation measures work best when the consumption bundle is roughly stable over short periods of time, and that just hasn’t been the case this year...
Perhaps most important, price rules and other forms of inflation rules don’t really work in times of pandemic. The very measurement of price inflation becomes arbitrary, and dependent on inertial measurement conventions from normal times, so the numbers don’t have enough actual economic meaning to guide policy.
Cowen makes these points in a wider essay discussing Fed decisions based on traditional price index measures, which I am less inclined to agree with, but his point here on how the quality of goods and services have declined during the lockdown is a very important observation.

Off the top of my head, I can think of instances where it applies to me.

The local Whole Foods maintains a count of the number of customers in its store and makes others wait outside until customers leave to keep the occupancy limited. I really don't have time for this nonsense (a cost for me) and so I rarely visit anymore.

There are restaurants that don't have outside dining just takeout. I pass them by.

The Jos. A. Bank clothing store in downtown San Francisco has closed. There is a sign in the window of the closed store suggesting I visit their nearest store---in Sacramento, a 2 hour drive.

It goes on and on. The unmeasured decline in goods and services that Cowen references because of the lockdowns is major and certainly not measured by the government indexes. Our standard of living is crashing.



  1. Great observations. A significant one Cowen missed is the sharp decline in services at Senior Living Facilities. Many states have developed pages of regulations specifically for Senior Living Facilities relative to Covid-19. Not only mask wearing (by both staff and residents) and social distancing but closure of on-site restaurants, game rooms, gyms and beauty salons. Some states have required whole buildings be quarantined. Access is restricted to whole buildings and detailed state required protocols which include being restricted to your apartment for 14 days after leaving the building to visit friends and family (who are not allowed to visit residents apartments). The professionals were managing these properties in a safe but flexible manner until the government stepped in. Now these buildings are semi-prisons and the residents are in constant fear of that "nasty bug." I know this from personal experience as my Mother is a resident in one such facility. She is 87 years old and thinks this is all just "over-kill" and will pass. She has made this her home and doesn't want to leave. Prefers the relative independence to living with one of her children but if things don't improve we may have to insist. Government has significantly degraded the lives of all residents and left them with few choices.

    1. There's still a total suppression of the well known vitamin D deficiency of people in nursing homes. As a long time zinc and vitamin D obsessive, I Googled "nursing homes vitamin D" in late March and this popped up about 3 seconds later. Why doesn't the endless suppression of this information amount to depraved indifference murder:

      In elderly people living in nursing home, vitamin D deficiency was higher and benefitting from ultraviolet index was lower compared to elderly people living in their own homes. Vitamin D deficiency could be prevented in elderly people, especially ones living in nursing homes, through enough sun exposure with appropriate clothing.

  2. A more mundane example is when small consumer goods, like bags of potato chips, have more air in them than before, or when package sizes get smaller with no price reductions. Entrepreneurs can be very creative dealing with the state's inflationary policies!

  3. In the 48 years since its founding in 1972, the BLM-SJW-Libertarian Party can take credit for the fact that 99.34% of the population still does not realize that inflation is a purposeful government program and not a mysterious and unfathomable force of nature. How can one explain the ABCT to such people? I mean explain it to the rabble. Not the BLM-SJW-Libertarians.

    1. Pretty easy... if you print money you're a criminal and will spend the rest of your life in jail. When a banker prints money, it's his to buy stuff with, and what he's doing is completely legal.

      So when bankers print money they can easily pay more for the same stuff, so prices rise. Thus year after year you have to pay more for the same stuff.

      (Of course, this is a gross over-simplification.)