Daniel, you wrote: “it [the CPI] measures changes in the price of the SAME goods or services.”
Actually, this is incorrect. Since the Clinton administration the CPI has made adjustments (always down, by the way) for “substitution effects.” For example, if steak filets increase by a large amount but rib-eyes don’t, the CPI statisticians assume that folks will to some extent switch over to the lower-priced rib-eyes. That’s just one of thousands of potential substitution examples. While there’s some logic to this, it certainly defeats the purpose of the CPI calculation because it specifically does NOT measure changes in the prices of the same goods or services.
Where your Cutlass example is concerned, essentially you’re getting at the issue of “hedonic adjustments,” which adjust prices in the CPI for changes in quality. Again, I understand the logic here. The problem is that it’s overdone where the average person is concerned. For example, computers have been showing substantial declines in price in the CPI for some time now because while the real prices have basically held roughly steady, the “perceived quality changes” have increased over time. While I buy some of the quality changes, I think they’re overstated. Most people, for example, don’t need any of the recent increases in available storage space, etc. That is, the average person is just using a smaller and smaller fraction of the total computer benefits available to them as each year passes. The same idea applies to many goods. We are forced to pay the same price or more for the goods whether or not we actually avail ourselves of any benefit from the “improvements.”
My guess is that the Williams inflation numbers are too high (Williams assumes zero substitution effects, no hedonics, no rental equivalents, etc.) and that the government figures are too low (they make unrealistic assumptions regarding substitution effects, hedonics, etc.). The answer is probably somewhere in the middle – maybe 4%-5% “real” inflation. Which isn’t very good. But isn’t the end of the world either.
