CPI Bias and Economic Growth

David Wessel gives us Bob Gordon's View on the Magnitude of CPI Bias:

WSJ Washington Wire: Has Anybody Told the Fed?: The Consumer Price Index is still overstating inflation, says Northwestern University economist Robert Gordon.... "My own retrospective view is that the upward bias in the CPI in 1995-96 was if anything higher than the Boskin (commission) estimate of 1.1 percent and was perhaps 1.2 or 1.3 percent," he says. Given the changes made since, and applying an approach similar to Boskin commission, he estimates the CPI currently overstates inflation by about 0.8 percentage points, a view that runs counter to frequent consumer complaints that the CPI understates the inflation rate they face.

Gordon says the true bias in the CPI is even larger if one takes full account of the improving quality of the goods and services he adds. "I think that these point estimates substantially understate the value of inventions, new products, and increased longevity. A century ago, our forefathers had to shovel coal, carry water into their dwellings, and heat it manually before bathing or the tedious scrubbing of clothes could take place. The value of running water, water heaters, forced air heating fueled by natural gas and the cleaner air that has resulted, is enormous, even if converted to an annual growth rate over 100 years.

"Recent research on the value of increased life expectancy creates growth rates in welfare that swamp the Boskin debates about 10 basis points here or there... Despite global warming, it still snows occasionally in Chicago, but I don't have to touch a snow shovel. My trusty Toro snow blower is a new product from the perspective of 50 years ago. The value of its invention is not included in the CPI. But, not only does it greatly ease the job of removing the snow compared to the old fashioned snow shovel, but it indirectly has contributed to my life expectancy."