How do we measure inflation? The simple question has a major impact on policy, yet there does not seem to be a strong emphasis on answering the question. Look at the top graph which is the inflation numbers using the 1990's methodology. The two series have followed the same moves so the numbers will be correlated but the inflation rate is closer to 6%. It does not take into account technological change or value-added for products, but it clearly shows we are paying more for goods if we did not fully take advantage of the basket changes.
The second graph is a longer-term perspective and shows that the inflation differential using a 1980's basket would be even greater. A basket change will bring down inflation as expected but clearly these adjustments may hide the inflation that is taken on if there is not a substitution effect.
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