Do We Even Know How To Measure Inflation In The Modern Economy?  

Moneybox
A blog about business and economics.
Jan. 2 2013 4:04 PM

Do We Even Know How To Measure Inflation In The Modern Economy?  

Matt Richtel writes in the New York Times about the increasingly intensive training that high-end baristas get as America's coffee tastes become more sophisticated. It's a great example, I think, of some of the great difficulties that the modern service economy poses for traditional ideas of measuring inflation.

The idea of inflation, you recall, is supposed to capture the difference between an increase in output due to more production (bushels of corn grown) and an increase in prices (each bushel costs more) which means that in an industrial economy you need to talk about the quality of goods produced. For many items the Bureau of Labor Services does this with its hedonic adjustment factors. The point of this is that with regard to televisions if the average sale price rises because people are buying TVs with more HDMI ports that's different from average sale prices rising because of inflation.

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But in the service economy this gets fuzzy. One of Richtel's points is that a great-tasting cup of coffee isn't just about buying the right beans or buying the right equipment to make them with—it's also about knowing the process correctly. But training and retaining skilled workers who can make great coffee is going to be more expensive than just not worrying about it. In theory, we should distinguish between paying more for better coffee (quality improvement) and paying more because of a general increase in the price level (inflation). But in practice this is pretty hard to do. Different cups of coffee can't be distinguished by their physical features the way men's sweaters are assessed based on whether they're made out of cashmere or wool.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.