Better cellphones are holding down inflation, but it may not feel like it: Don Pittis

The 3 Week Diet

If you’re wondering why official inflation is so low while many everyday goods seem more expensive, you can put part of the blame on technology.

Tomorrow, Bank of Canada governor Stephen Poloz and many others will be watching for the latest inflation statistics.

It may seem counterintuitive, but central bankers like Poloz want prices to rise as a sign the economy is returning to health. In fact, they have predicted they will rise. But so far inflation has been stubbornly low.

Better and better technology

While there are many factors holding down the inflation number, one of them is that our technologies — from cellphones to TVs to computers — are getting better and better.

In fact, in the United States, the world’s most powerful central banker, Janet Yellen, pointed directly at cellphones for a surprise drop in this year’s inflation rate.

“For some months running we’ve seen unusually low inflation readings,” Yellen testified to Congress last week. “There appear to be some special factors that partly account for that, for example quality-adjusted prices of cellphone plans plunged several months ago.”

Eniac, University of Pennsylvania

The Eniac, considered the first general purpose computer and developed at the University of Pennsylvania, filled a room. A modern cellphone is more than 1,000 times more powerful at a tiny fraction of the price. (University of Pennsylvania Archive)

The U.S. and Canada calculate inflation in different ways but the results are broadly the same, says economist David Laidler, an emeritus professor at Western University, who was the first outside adviser to the Bank of Canada.

Laidler, who studied with the Chicago School economist Milton Friedman, relates a story about the famous monetarist.

“He used to offer his students the choice between Sears catalogue from 1929 and Sears catalogue in the year he was teaching the course,” recalls Laidler.

The Amazon of its era

The reference seems poignant as Sears Canada begins selling off goods as part of its bankruptcy proceedings, but the Sears listing of mail-order goods was the Amazon of its era, giving people across the United States and Canada a choice of goods previously only available in big cities.

In the thought experiment, Friedman told students they could each have $1,000 to spend. They could spend 1929 dollars in the 1929 catalogue or 1963 dollars in the 1963 catalogue. 

“In the ’60s when I was taking the course, everyone said, ‘I’ll take the 1960s catalogue,'” says Laidler.

sears catalogue electric belt

An early 20th century Sears, Roebuck and Co. catalogue advertises the Giant Power Heidelberg Electric Belt, claimed to improve a person’s well-being, at $18. Technology has changed. (Sears)

Friedman’s point was that despite the inflationary advantages of using 1929 money, by 1960 technology had made the earlier goods unappealing or useless.

For instance, you could get a really good deal on an enamel chamber pot or an enormous wooden radio console, but no one would want to buy them despite the savings.

“The fact is, goods change over time and you’ve got to make allowances for that,” says Laidler.

Adjusting for quality

Somehow those changes have to be incorporated into the inflation numbers, and that is what Statistics Canada does with something called quality adjustment

When Statistics Canada assembles the basket of consumer goods and services it uses to compare last month’s prices with this month’s prices, it has to be sure it is comparing like with like, says Statistics Canada economist Kyle de March. 

“A manufacturer may decide to change its box size of a box of cereal from 500 to 400 grams,” says de March. “So they’ve shrunk the box but the price stays the same.”

To get a correct reading on the consumer price index Statistics Canada has to adjust for the change in quality of that box of cereal in the basket of goods.

But technology is more complicated.

Now: Same box, more cereal

In the case of the cellphone plan Yellen mentioned, the price may not have changed, but the service was improved as providers offered unlimited data packages.

In this case the electronic box contained more cereal but the price was about the same.

Statistics Canada’s de March uses the example of TVs that have improved in screen quality while prices have remained the same or even declined.

“You’re paying for a higher quality good and we want to keep the constant quality over time, so we have to take off some of that price,” says de March. In other words, technology that improves will show a price decline in the basket of goods.

The moon in a laptop

Some economists have complained that statisticians in the U.S. and Canada create what they call a quality bias, refusing to properly acknowledge the huge advantages consumers get when they can buy a laptop with the same power as the NASA computers that sent people to the moon.

Such changes in value are at some level subjective — based on expert judgment of how quality affects consumer value — although de March says Statistics Canada does its best to use objective tools to calculate those changes.

In an era when the ubiquitous cellphone is a stereo system and a camera and a typewriter, a tape recorder, a postal service, a games console, a video recorder, and so much more, it is hard to deny that the collective price of all that stuff has declined.

But although such improvements pull down the inflation figure, they can mask the rising cost of other necessities that affect poor or elderly people who spend little on technology.

Follow Don on Twitter @don_pittis

More analysis from Don Pittis

SOURCE: CBC.ca

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