OER is understating CPI

I recently heard (can’t recall where) a great characterization of today’s inflation: “high frequency items are going up in price while low frequency items are going down.”

Things we buy every day – energy and food – are going up in price. Things we buy less frequently – washing machines, electronics and housing – are going down in price.

I think this phenomenon is helping to understate inflation as measured by the CPI. Or, at the least, it does not reflect the pain people are feeling as a result of the current economic environment. It’s true that housing has gotten considerably cheaper (called Owners’ Equivalent Rent in the CPI). But a large segment of the population is stuck in a house they purchased at the top of the market. For these people, housing hasn’t become any cheaper. Also, most people are not benefitting from a cheaper washing machine or ipod because they can’t afford it anyway – they’re too broke from buying food and gas.

A possible reason why low frequency items are going down in price: prices are being slashed to move inventory. This is exactly what happened to Sears this past quarter.

Inflation Anecdote:

The Laundromat in my building has raised prices substantially:

Medium Size Wash: was $3; now $3.25 – 8% increase

Dryer: was $.25 for 8 minutes; now $.25 for 6 minutes – 25% increase

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2 Responses to OER is understating CPI

  1. Dave says:

    25 cents for 6 min!!!! Those Bastards! Could be cheaper to drop off….unless that got raised to.

    Hey not nit picking but I am curious as I was playing with the numbers, but isn’t that a 33% increase and not 25% which is even more ridiculous?

    ie 24 minutes used to cost .75, now costs a dollar. Change = .25 / old base .75 = 1/3?

    Is that how you do it?

  2. willrwright says:

    Dave — good catch. I stand corrected.

    It is ridiculous, though…

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