Wednesday, March 08, 2006

Inflation: Which Way Is It Going?

Paul Krugman, and other economists, often assert that real wages have been relatively stagnant over the last 25 years or so, due to inflation. I have taken the other approach, that inflation is actually overstated, due to the difficulty of measuring changes in the quality and assortment of consumer products over long periods of time. For an excellent explanation of this, check out Cafe Hayek.

Now I have been pointed to this rather creative article on MSN Money, arguing, among other things that inflation has been understated by 70% since the Carter years. Given the previous argument that wages as currently measured have been stagnant, this would then mean that our real wages, and thus standard of living, have decreased by over half over the last 25 years.

How this has happened without anyone noticing is beyond me. Everyone I know is living in bigger homes, driving bigger cars complete with ABS, power steering, heated seats, 17 speaker stereos with 6 disc CD changers. People eat out more often and are fatter than ever, hardly indicative of a severe fall in living standards. Laptops, cell phones, and I-Pods are smaller than they were 25 years ago, I guess that must indicate a fall in living standards! I suppose 25 years ago people used to pay 10 cents for a cup of coffee, and are now forced to pay $4.50 for a venti triple decaf non-fat mocha with caramel sauce at Starbucks, so this must be the hyperinflation he is talking about.

Amazing, simply amazing.