Getting back to the main point of this post, which is inflation, do you think hedonic or quality adjustments make any sense in calculating inflation? If you do not agree with owners’ rent equivalent as the correct measure of housing inflation, what would be better? And, do you think the calculation should (or should not) include product substitution.

And, finally, these changes were made over decades in various administrations. Even Bill Gross hints at a nefarious purpose for these changes which would be to reduce COLA adjustments to Social Security etc. Do you agree that this was the purpose of the adjustments? If so, who was behind it?

Who was behind this change that happened in 1994, President Clinton? Why would President Clinton have wanted to shortchange retirees on Social Security? If not Clinton, then who was behind it? Nameless, faceless bureaucrats? What would have been their motivation? Was it Congress? What would Congress’ motivation have been? And, if it wanted to reduce cost of living payments, couldn’t Congress have just tied Social Security cost of living increases to wage increases?

Compare the entry level and mid-class vehicles then with now.

The eighties 190 = today’s C class.
300 Class = E Class
300 Coupe = CLK
500 = S class

Speak to anyone at Mercedes USA and they will confirm this lineup matchup (I can put you in touch with people there)

I have a 1967 230SL, and a 1986 580SL — the later car is bigger heavier faster mopre expensive than the earlier one — but they are the parallel machines.

One other important point: In a competitive business like automobiles, you either move forward — or die. These hedonic changes that some people point to as proof of lack of inflation is (IMO) no such thing. It reflects the dynamicism of capitalism, and the inevitable progress of Humanity’s ingenuity. That we make things better faster smarter says nothing about the changing pricing of goods and services, and everything about innovation and copmpetition.

By the way, I read your blog (http://bigpicture.typepad.com/) regularly and enjoy it.

And, I really don’t see the ‘conspiracy’ side of the argument you made in this statement…’

‘…So why start in 1994? Because that was the year they needed to address social security COLA increases, and to do so they ruined the integrity of the CPI as a data series…’

You write that some nameless group (’they’) ruined CPI in order to shortchange retirees. Who was behind this change that happened in 1994, President Clinton? Why would President Clinton have wanted to shortchange retirees on Social Security? If not Clinton, then who was behind it? Nameless, faceless bureaucrats? What would have been their motivation? Was it Congress? What would Congress’ motivation have been? And, if it wanted to reduce cost of living payments, couldn’t Congress have just tied Social Security cost of living increases to wage increases?

In 1984, the Mercedes 300 CD was the middle of MB’s three main lines. The low end was the 190 — it was the smallest of the three main lines, and while the 500 series was the bigger vehicle. The modern equivalent of the 190 is the C class — the car you recently purchased. Its currently the smallest of MB’s 3 main lines. There is also a coupe version — the CLK — but its more expensive, starting at $46k.

Your 1984 vehicle — the turbo-diesel coupe — was the midline car. It was larger than the entry 190 vehicle (which was an ugly little thing), but smaller than the big 500 sedan. In today’s MB lineup, it would be equivalent to the 2008 to Mercedes’ E class. The 500 series of course matches up with the S class.

The E class today starts at $51k and goes all the way up to the $86k for the AMG version. Its most commonly sold configuration is for the E350 4Matic Wagon, which starts at $56k and with options, can go to the mid-$60s. (The E320 Sedan is $52k.)

If you really want to see inflation, look at the dimensions of all of these vehicles — The Small C is grown, as has the E and the S. All of them are bigger, faster and more expensive.

But comparing the 300 Series coupe with the C class is Apples and Oranges. These are not the equivalent cars in the manufacturers line ups. And, they are priced accordingly.

I argue he changes made to CPI (hedonics and subsititution) render it useless for historical analysis. Basically, comparing CPI inflation now to CPI inflation in the 1970’s and 80’s is like comparing apples and oranges. And yet, just about every day you hear an economist or Federal Reserve Board member say that today’s inflation is nothing like the 70’s, or that our real interest rates are higher than they were then.

The BLS, ideally, should have continued to publish the old CPI alongside the new, and that way we could have a consistent basis for historical comparisons. Note that quality improvements are nothing new: the CPI never captured the quality improvements from black and white TV’s to color, from cardboard packaging to plastic; from manual to automatic transmission; etc. So why start in 1994? Because that was the year they needed to address social security COLA increases, and to do so they ruined the integrity of the CPI as a data series.