Inflation has been pretty well contained lately, averaging well below the Fed’s target rate of 2 percent. But could the true rate of inflation be even lower than that? In a recent piece for The Wall Street Journal, Andy Kessler explains why.
Kessler sees quality adjustment as the big flaw in the CPI and other standard inflation. Government statisticians try to make quality adjustments, but, as Kessler says, “by the time the BLS puts something new in the CPI basket, it’s already cheap.” As a result, he thinks, the CPI overstates the true rate of inflation by about 2 percentage points.
Is he right? Even the best econometricians aren’t sure. That’s not because they aren’t good at what they do. Rather, it’s because quality adjustment is fundamentally subjective.
With that in mind, I’ve developed my own purely subjective approach to gauging inflation, based on a fantasy shopping trip to the past. Off you go, into the time machine. All I ask is that you bring back an answer to this question:
If you could choose between shopping today at today’s prices, or shopping in the past at past prices, what items, if any, would you buy from the past?
Although I can’t give you a seat in a real time machine, I can give you the next best thing: An old Sears Catalog. A great website, www.wishbookweb.com, keeps an archive of page-by-page images for these “Wishbooks” going all the way back to 1937. I won’t take you back that far, just to 1962. I pick that year because that was before the “Great Inflation” of the 1960s and 1970s, which tripled the U.S. consumer price level over the next two decades. All prices quoted from the 1962 catalog are the actual nominal prices of that year, with no adjustments for inflation.
Let’s go shopping!