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Have Americans made progress since the 1960s or 1970s? Some say not, but they are basing their conclusions on bad inflation data.

A typical study looks at something like average earnings or median earnings over time, and adjusts the dollar earnings for inflation. The two possible problems are mistakes in calculating income, and mistakes in adjusting for inflation. The primary mistake in income is ignoring benefits. So when you see an analysis about the median wage rate, keep in mind that benefits have grown much faster than wages.

Moreover, our income is best thought of as purchasing power: we don't want dollars per se; we want bread and shoes and movies and cars. Keep this in mind as we discuss inflation adjustment.

Using the Consumer Price Index or any other common inflation measure is very challenging for long-term analysis. Let's begin with the first generation iPod. The government statisticians (at the Bureau of Labor Statistics) ignore all new products on the market. Most of them are flashes in the pan. When a product catches on, they start tracking its price. Then when they have some history, they add it to the mix of product price that figure into the CPI.

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Here's what they miss: we are better off by having the iPod in the first place. Consumers flocked to it, as they did later with the iPhone, iPad and lots of devices from outside Apple (NASDAQ:AAPL). Consumers voted with their wallets and said, "We are better off with these products and without the dollars they cost." The opportunity to buy an iPod does not figure into incomes or price statistics. The creation of the wonderful device is lost to statisticians, who only look at it when it's a mature product.

The iPod may seem like a trivial example, but how about statins, those anti-cholesterol drugs that many of us take? They don't show up in my earnings, and they show up in the CPI based on their recent price change. The fact that they are keeping many of us alive does not show up in the statistics.

The New York Times covered this topic a few years ago:

In the early 1950's, Toro began selling mass-market snow blowers, which weighed up to 500 pounds and cost at least $150. As far as the Bureau of the Labor Statistics was concerned, however, snow blowers did not exist until 1978. That was the year when the machines began to be counted in the Consumer Price Index, the source of the official inflation rate. By then, the cheapest model sold for about $100. In practical terms, this was an enormous price decline compared with the 1950's, because incomes had risen enormously over this period. Yet the price index completely missed it and, by doing so, overstated inflation. It counted the rising cost of cars and groceries but not the falling cost of snow blowers. The cellphone and the air-conditioner also improved middle-class life, and also took years to get into the inflation numbers, by which point their prices had plummeted. Wal-Mart's effect on prices is another blind spot in the index, which considers something sold at a discount to be lower quality (and, therefore, not truly a bargain) than something sold at full price - even when the items are identical, like a box of Tide or a can of Campbell's Soup.

New technology keeps me alive, keeps me rocking to tunes, keeps my house more comfortable, keeps my car running longer, and gives me more healthy options at the grocery store (which I may or may not take advantage of). The benefits of new technology are lost in the typical arithmetic of incomes adjusted for inflation.

Disclosure: No positions

Source: Long-Term Inflation: We're Better Off Than The Statistics Show