Money For the Rest of Us · Wednesday, July 15, 2026
David Stein discusses the historical evolution of the Consumer Price Index (CPI), noting a significant methodology change in 1996. Previously a fixed-basket measure, the CPI now incorporates factors like substitution bias (consumers switching to cheaper goods), outlet bias (shopping at lower-price stores), and quality changes. Stein suggests these adjustments should be reflected in inflation measures to represent the cost of living.
“Back in 1996, there was an advisory commission to the Senate Finance Committee to study the Consumer Price Index. And in December 1996, they released their final report. And at the time, CPI was a pretty straightforward measure. It was a fixed basket of securities, consisting of goods and services. The basket didn't change very much. And it just measured what did that basket cost, at representative basket of a household in the US. What did it cost from, you know, the changes, month to month. And that was inflation.”
“When prices of things go up, we as consumers will often substitute. I'm eating fewer berries now than I used to because the prices are much higher, partly due to tariffs on berries, since the bulk of berries that at least I consume, part of the year, they come from Mexico. Now, we're in the season where they're coming from the US. But I'm eating cherries now because cherries are in season. My fruit cost are less in my personal basket because I've made a substitution. And we all do that.”
“There's also the quality change bias. Things get better over time. Computers, you know, phones, things get better. Well, that's good for us. But if the price of devices aren't adjusted for improvement in quality, then it looks like inflation is higher than it otherwise is. Maybe the price went up, but you're getting a better product now.”