Amazon’s Echo Joins The Consumer Inflation Basket

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The Office For National Statistics has said that Amazon’s Echo – or at least products like it, the Google Home and so on – have joined the consumer basket we use to measure inflation. At the same time envelopes have dropped out of that basket.

Obviously enough we’re talking about the effects of technological advance. We all send email so don’t need paper envelopes – at least routinely – and these smart speakers are becoming routine. OK, fair enough.

The problem is this leads to a problem with how we measure the whole economy. And the faster technology advances the worse the problem gets:

Today we learn that Amazon’s Echo speaker and similar smart speakers have been added to the basket of goods the Office for National Statistics uses to calculate inflation. It’s another useful reminder of how we tend to overstate inflation and thus understate economic and real income growth.

It’s a problem that has also been getting worse for the past few decades and it’s large enough to entirely skew what we think we know about living standards.

The basic problem is that not only do the relative prices of things change, but that people consume different things over time. Vesta curry kits were all the rage in the 1970s and who would bother with them these days? Landlines are becoming increasingly obsolete thanks to mobile-only packages, so why would we include the former in the inflation statistics? These kind of changes need to be reflected in how inflation statistics are measured over time.

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