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

If you're wondering why official inflation isso low while many everyday goods seem more expensive, you can put part of theblame on technology.

Tomorrow, Bank of Canada governor Stephen Polozand 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 theywill 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 technologiesfrom cellphones to TVs to computers aregetting 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," Yellentestified to Congress last week."There appear to be some special factors that partly account for that, for examplequality-adjusted prices of cellphone plans plunged several months ago."

The U.S. and Canada calculateinflation in different waysbutthe 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 economistMilton 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 Searslisting 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 $1,000to 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.

Friedman's point was that despite the inflationary advantages of using 1929 money, by 1960technology 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 Canadaassemblesthebasket 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 likewith 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 planYellen mentioned, the price may not have changed, but the service was improved as providers offeredunlimited 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 andwe 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 cellphoneis a stereo systemand a cameraand a typewriter, a tape recorder, a postal service, a games console, avideo recorder, and so much more, it is hard to deny that thecollective price of all that stuff has declined.

But although such improvementspulldown the inflation figure, theycan maskthe rising cost of other necessities that affect poor or elderly people whospend little on technology.

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