An article in last Sunday's Business & Finance section stated incorrectly that government statistics now show, it would mean that productivity and real economic growth might be "overstated." The sentence should have read "understated." In the same article, Edward F. Denison, a former Brookings Institution economist, was quoted without proper identification because a paragraph with complete identification inadvertently was dropped from the story. CAPTION: (NEW-LINE)Illustration, no caption, The Washington Post
When the government issues its new consumer price report later this month, the figures are expected to show again that inflation is not abating. The overall index is likely to shoot up another 0.8 percent or more for March. Price levels now are more than double their 1967 average.
But you may want to take heart, because in the view of some economists inflation may not be quite as bad as the statistics indicate-at least when you take account of what your money is buying these days in terms of better quality or performance.
While government statisticians track quality changes as best they can, a small group of economists insists the figures don't adequately reflect the full year-to-year improvements in product performance levels. They argue that with these changes included, the true cost to consumers actually is down.
Those who support this notion still are in the minority, and aren't really challenging the veracity of the current index. Virtually all analysts are agreed the U.S.'s economic statistics are the most accurately kept in the world-and the most complete. The argument is only over how far they go.
But those who criticize the present methods contend the difference could be significant. Robert J. Gordon of North-western University estimates that fully taking account of improvements in quality and performance of various products could pare between 1 and 2 percentage points from the overall inflation rate.
If the inflation rate actually is lower, that could mean that productivity and real economic growth are overstated. It also could mean billions of dollars in savings for employers. Many private wages and benefits and some government payments as well as tied directly to the inflation index.
The examples of what the critics are talking about aren't too hard to find:
Take tires, for instance. In 1934, the price of a standard automobile tire was $13. Today, according to the consumer price index, it's $68-a jump of 423 percent. Even with the rise in personal income during the period, it's enough to drive a person to retreads.
But that assumes you're buying the same sort of tire you did in 1935-a 4-ply cotton capable of wheeling a 1.45-ton auto at 40 mile-an-hour speeds for an average life of 7,000 miles. Today's $68 model bears a 1.95-ton car at an average 50 m.p.h. speed for 40,000 miles or more.
So, while the price per tire rose 423 percent over the period, the cost of the tire per mile driven-a measure some analysts consider far more realistic-actually fell 9 percent (from $.00186 to $.00170). And the cost per ton-mile driven plunged a dramatic 32 percent.
To be sure, not all price rises have been accompanied by such improvements in performance. The quality of raw farm products, for example-grains, soybeans and fresh fruits and vegetables-hasn't changed much over the years. Nor has a gallon of home heating oil, or a quart of milk.
But the improvements are indisputable for a spate of other key items in the price index:
Today's household appliances may cost more in terms of price per article than their 1950s forerunners, but they also do much more and are more efficient to boot.
Apparel has been improved substantially in recent years, both in terms of durability and maintenance. Today's weaves and polyesters are stronger, longer-lasting, lighter and easier to maintain than clothes were even a few years ago. And they keep improving every year.
Cigarette prices have risen sharply on a cost-per-pack basis, but the raw data don't account for "quality" changes: For example, the amount of tar in cigarettes is 9 percent lower today than it was in the 1950s, while taxes have risen 9 cents a pack.
The index measurng the cost of "personal care" items is sharply higher than it was in the prewar period, but products are undeniably better: Modern toothpastes contain cavity-preventing ingredients, razors last longer and are safer, deodorants are more effective.
There also is the issue of taxes. Increases in property taxes, sales taxes, license fees and other costs of government are dutifully recorded by the price index each month, but without any regard to improvements in services by federal, state and local governments. Sometimes the differece is substantial.
Relatively few such changes are taken into account now by government price-watchers.
The Bureau of Labor Statistics, which compiles the price indexes, adjusts prices to account for some quality changes - but it's primarily those where the improvements boost the manufacturer's production costs, such as in the case of stronger bumpers for automobiles. Many more subtle changes are ignored.
But some outside economists say these adjustments are not widespread enough or detailed enough to take account of the improvements in performance, and as a result the inflation figures BLS publishes actually may overstate the amount of pain to consumers' pocketbooks.
F. Lee Moore, a Nyack, N.Y., economist who computed the figures on tire prices and compiled the listing cited earlier in this article, charges the government is mislabeling its prices index as a cost-of-living index. BLS officials flatly deny this.
What BLS does is to send out price-samplers across the nation to chart prices of a specified "marketbasket" of goods. The list is the same every month-say, a 23-inch console-model color TV set with veneer cabinet. To make sure they're accurate, the agents survey the same stores every month.
What Moore and other economists are complaining about is that the index measures prices, but doesn't measure performance. "The prevailing method of indexing price has not changed significantly since it was formalized early this century," Moore says. "The only change that counts is change in quoted price."
Moore's basic complaint is that "the index assumes that consumers realize no monetary gains from changes resulting from innovation, invention, refinement, new retail marketing methods and improved consumer knowledge. We measure the price per light bulb, but not per lumen-hour of light."
Gordon, Moore and Yale University economist Richard Ruggles say the monthly BLS sampling-while accurate within its limits-fails to take account of several key changes that often affect both cost and quality:
Improved performance. According to the CPI, the average price of motor oil has risen 234 percent since 1935. But today's motor oil performs better and lasts longer than its predecessor. Taking this into account, Moore says, the average cost per mile has declined 52 percent.
Replacement products. The most prominent example here is the introduction of the pocket calculator. Although the market for these mushroomed in the early 1970s, BLS didn't begin including them in the index until last year-after their prices had declinded 90 percent from initial levels.
New features. BLS may adjust its indexes for a visible improvement, such as automatic ice-makers on refrigerators, but it doesn't fine tune to reflect less-obvious changes that improve efficiency but don't raise production costs- adding sealed bearings, better insulation and microprocessors.
Substitution. The CPI shows the price of a movie has soared 330 percent since 1948, but Moore complains it doesn't reflect the shift to television as a substitute. Today, consumers can get the same two hours of "movie-like entertainment" at a cost 80 percent below the 50-cent movie price of 1948.
Discounting. The CPI checks only those prices charged in its regular sample outlets, not those at discount chains or special writeoffs such as the discount fares now offered by most airlines. Yet analysts say it's obvious a growing proportion of Americans now take advantage of discounts.
Moreover, BLS surveyers price precisely the same products each month, at the very same stores each time. If a competing brand of similar quality is on sale one month-or is widely availale at reduced prices at other stores-it makes no dent in the index.
BLS officials concede Moore and other critics "have a point" on a few of their complaints, but argue that trying to evaluate performance gains would be impossible in some areas-and could force the agency into making subjective judgments that might impinge on its non-partisan credibility.
John Layng, assistant BLS commissioner for prices, says agency technicians proposed using Moore's kind of performance measure for housing costs a few years ago, but were turned down for just such reasons. Layng asserts flatly that Moore and others are "exaggerating the extent of the problem."
And Joel Popkin, a private consultant who once headed BLS' price division, says a third of the disparity Gordon cites could be eliminated if the agency would only include computer prices in its wholesale price index. Popkin says that index would rise more slowly then, but the CPI would be unchanged.
The question is, what, if anything, to do about the CPI's shortcomings? If the government's inflation measure is 1 to 3 percentage-points too high, as Gordon and Ruggles claim, than why not revamp the CPI again? Or at least include adjustments for some of these performance changes?
Gordon, for example, asserts BLS should get busy today and drop its insistence that it can't be "subjective" in judging performance changes.
But other analysts aren't so sure. Moore and Ruggles, for example, insist they'd be just as happy if BLS simply included a "warning label" in its monthly CPI report cautioning the public that the index does measure only prices, without taking account of improved performance.
Indeed, a hint of the complexities came recently when Gordon, complaining about BLS' failure to include pocket calculators in the index, noted that they cost far less than the electromechanical calculators of the 1960s, which they were designed to replace.
Denison cracked, only half-jokingly: "I thought they were designed to replace slide-rules." And so the debate went on.
Still, next time you're troubled about high prices, it may be worth remembering that despite widespread grousing, there are a lot of products sold today that far outperform the lower-priced items of the good old days. It's just that the government doesn't measure them all.