Doug wrote >All these "technical revisions" have been happening over > the last few years, and I'll bet this one's been in place for a while.
Undoubtedly given how long the BLS tests things before they introduce it. But although this revision will reduce the measured inflation rate, it has very good foundation within the neoclassical theory of price indicies. It attempts to generate a "constant" utility basket of goods as opposed to a fixed basket of goods. The former is actually was is required by the neoclassical theory of price indicies. Although it can be important to point out the political factors behind any change in the CPI (among the goals of this political agenda is to reduce the rate at which social security payments grow over time), it is also important to point how that any neoclassical price index inherently violates certain key claims of the theory, one of which is not not make interpersonal utility comparisons. Not only does a intertemporal price index compare utilities of different people it does so across time. Strong evidence exists, I think, that over time "utility" becomes more demanding over time. This is something that the CPI assumes away but is something very important for determining subjective experiences of the standard of living in differ times. For instance, if you had the EXACT same set of goods consumed by someone who lived in, say, 1950 your "real material standard of living" would be exactly the same as this person in 1950. That is, according to the assumptions behind the CPI. But, in fact, you would likely be very unhappy if you had to consume the exact same goods someone from 1950 consumed. Imagine that you had to drive the incredibly unsafe cars driven in 1950? Imagine if you had to use the same phone as they did. Imagine if you had the sort of TV they had. This points out the real flaw of neoclassical price indices. It assumes people's preferences do not change over time. But over time we become more demanding (endogenous impact of capitalist expansion of quality of goods). THe CPI does not take account of this, however. Eric
