FacebookTwitterRedditEmail

Measuring Inflation During the Time of Coronavirus

There has been some discussion of whether we should anticipate deflation or inflation as a result of the impact of the pandemic. I have been in the camp arguing the latter, based on the idea that precautionary measures will raise costs in major areas of the economy while reducing supply. (This is not an argument against stimulatory policies that are needed to restore employment. The inflation is a one-time price rise that will be reversed when we get effective treatments and/or a vaccine. It is not an inflationary spiral story.)

However, it did occur to me that there is an important measurement issue that could affect how we view higher prices. To see the issue, let’s imagine we had Donald Trump’s bar and grill. As Trump has advocated, we have people tightly packed together, eating their burgers and fries. There are also long lines at the door, with no one practicing social distancing.

Now, imagine that Dr. Fauci takes over the restaurant after it goes bankrupt (this is a Trump business) because so many of the customers were getting sick. Under Dr. Fauci, the restaurant adopts safe practices. This means operating at only one quarter capacity, having sufficient time between parties to ensure that the tables, chairs, and surrounding areas are fully sanitized, and having checkers at the door taking people’s temperatures and asking about their health and contacts. To cover his higher costs, Dr. Fauci raises prices by 50 percent.

So, the question for inflation hawks everywhere is whether this 50 percent price increase should be treated as inflation? The counter argument is that Dr. Fauci’s restaurant is providing a better product than Donald Trump’s restaurant. Customers can eat their dinner with a much lower risk of catching the coronavirus. This should be worth a premium, just like people are willing to pay more money for a car with automatic braking or other safety features. In effect, this is a quality improvement, not an increase in price.

My guess is that the folks at the Bureau of Labor Statistics will not see it that way and treat safety related price increases as inflation. I’m not knocking them, they would have to develop the methodologies to make the adjustments. That takes time and we’re seeing the price increases now. I’m just trying to call attention to a conceptual problem here.

While the problem is extraordinarily stark in this case, it is not a new one. I used to point out that AIDS led to a reduction in the measured rate of inflation. The reason is that when expensive new treatments came into use, their price was not picked up as an increase in the CPI or other price indices. (We only measure the change in price of existing drugs, not the cost of new drugs.) When these drugs came off patent, and their prices plunge, their price decline would be included in the CPI, lowering the overall rate of inflation.

There is no real solution to this sort of problem. The CPI is inherently individualistic. It measures the change in quality-adjusted prices as though the world around us is unchanging. However, we know it does change constantly and the value assigned to goods and services changes enormously as a result. (Hey, anyone want a lava lamp or a bean bag chair?) And it’s not just fashions. Our need for major items like cars, cell phones, and Internet access depend hugely on the social environment.

For this reason, we can’t really say that the CPI is measuring changes in the cost of living. It is a price index. Oddities, like the treatment of safety related price increases that are a result of the pandemic, may bring this point home, but the problem is always there even if we choose to ignore it.

This article first appeared on Dean Baker’s Beat the Press blog.

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

Weekend Edition
August 07, 2020
Friday - Sunday
John Davis
The COVID Interregnum
Louis Yako
20 Postcard Notes From Iraq: With Love in the Age of COVID-19
Patrick Cockburn
War and Pandemic Journalism: the Truth Can Disappear Fast
Eve Ottenberg
Fixing the COVID Numbers
Jeffrey St. Clair
Roaming Charges: Every Which Way to Lose
Paul Street
Trump is Not Conceding: This is Happening Here
Robert Hunziker
The World on Fire
Rob Urie
Neoliberal Centrists and the American Left
John Laforge
USAF Vet Could Face ‘20 Days for 20 Bombs’ for Protest Against US H-Bombs Stationed in Germany
Andrew Levine
Clyburn’s Complaint
Kavaljit Singh
Revisiting the Idea of Pigou Wealth Tax in the Time of Covid-19
Paul Ryder
Here Come the 1968 Mistakes Again
T.J. Coles
Fighting Over Kashmir Could Blow Up the Planet
David Macaray
Haven’t We All Known Guys Who Were Exactly like Donald Trump?
Conn Hallinan
What’s Driving the Simmering Conflict Between India and China
Joseph Natoli
American Failures: August, 2020
Ramzy Baroud
Apartheid or One State: Has Jordan Broken a Political Taboo?
Bruce Hobson
The US Left Needs Humility to Understand Mexican Politics
David Rosen
Easy Targets: Trump’s Attacks on Transgendered People
Ben Debney
The Neoliberal Virus
Evelyn Leopold
Is Netanyahu Serious About Annexing Jordan Valley?
Nicky Reid
When the Chickens Came Home to Roost In Portlandistan
Irma A. Velásquez Nimatuj
The Power of the White Man and His Symbols is Being De-Mystified
Kathy Kelly
Reversal: Boeing’s Flow of Blood
Brian Kelly
Ireland and Slavery: Framing Irish Complicity in the Slave Trade
Ariela Ruiz Caro
South American Nations Adopt Different COVID-19 Stategies, With Different Results
Ron Jacobs
Exorcism at Boston’s Old West Church, All Hallows Eve 1971
J.P. Linstroth
Bolsonaro’s Continuous Follies
Thomas Klikauer – Nadine Campbell
Right-Wing Populism and the End of Democracy
Dean Baker
Trump’s Real Record on Unemployment in Two Graphs
Michael Welton
Listening, Conflict and Citizenship
Nick Pemberton
Donald Trump Is The Only One Who Should Be Going To School This Fall
John Feffer
America’s Multiple Infections
Kollibri terre Sonnenblume
Thinking Outside the Social Media Echo Chamber
Andrea Mazzarino
The Military is Sick
John Kendall Hawkins
How the Middle Half Lives
Graham Peebles
The Plight of Refugees and Migrant Workers under Covid
Robert P. Alvarez
The Next Coronavirus Bill Must Protect the 2020 Election
Greg Macdougall
Ottawa Bluesfest at Zibi: Development at Sacred Site Poses Questions of Responsibility
CounterPunch News Service
Tensions Escalate as Logging Work Commences Near Active Treesits in a Redwood Rainforest
Louis Proyect
The Low Magic of Charles Bukowski
Gloria Oladipo
Rural America Deserves a Real COVID-19 Response
Binoy Kampmark
Crossing the Creepy Line: Google, Deception and the ACCC
Marc Norton
Giants and Warriors Give Their Workers the Boot
David Yearsley
Celebration of Change
FacebookTwitterRedditEmail