:: By Lydialyle Gibson

:: Graphic by Allen Carroll

Investigations ::

Inflated inflation

The U.S. Consumer Price Index (CPI) has long provided a popular yardstick for calculating the country’s inflation rate. Initiated by the Bureau of Labor Statistics after World War I, the CPI, also called the “cost-of-living index,” gauges the price level of consumer goods and services on a monthly basis. But it fails to account for upgrades and innovation—substituting new and better products for outdated ones. In a 2007 National Bureau of Economic Research working paper, GSB economist Christian Broda and a Columbia University coauthor found that by ignoring that process, the CPI overstates inflation by .8 percent per year, because it mistakes price increases brought on by higher quality for simple inflation. And since more and higher-quality products go to market during flush times, the researchers argued that real consumption fluctuates more widely between bust and boom than the CPI indicates.