Oh, Joe Middle Class certainly experiences the 12% increase, no doubt about that. I’m arguing that it’s a fair increase (not inflation), because he’s fatter and older than he used to be, and he gets MRIs and CAT scans that he didn’t used to get.
So yes, in a nutshell, the overall cost of living is going up faster than the CPI, because people’s standards have gone up. They consume more of everything. Even if inflation were absolutely zero, people would still pay way more on health care now than 10 years ago, because they go to the doctor way more often and gobble pills like there’s no tomorrow.
That’s my main point: the increase in cost of living that people “feel” is not necessarily inflation. They do get more or better goods or services.
And on to your last point: of course they’re not the same goods as 20 years ago. They don’t make Oldsmobiles anymore. But as long as the change is continuous, the CPI makes sense. Let me give you an example: say the Olds Cutlass is in the CPI basket. It costs $11,000 in 1990, and same model costs $11,220 in 1991, so the 1991 CPI is 2%. But they stop making it in 1992. What to do now? Answer: change the car to a Camry. But a Camry costs much more (say, $14,420) in 1992, is that fair? Answer: find out how much the same model Camry cost in 1991 and use that info. If the Camry was $14,000 in 1991, then the 1992 CPI is 3%. Joe Middle Class, who bought a Cutlass in 1991 and a Camry in 1992, feels a much bigger price increase than 3%, but he changes from one car to another. Only 3% is inflation. The rest is improvement.
