DO HIGHER PRICES FOR NEW GOODS REFLECT QUALITY GROWTH OR INFLATION?

Much of Consumer Price Index (CPI) inflation for consumer durables reflects shifts to newer product models that display higher prices, not price increases for a given set of goods. I examine how these higher prices for new models should be divided between quality growth and price inflation based on (a) whether consumer purchases shift toward or away from the new models and (b) whether new-model price increases generate higher relative prices that persist through the model cycle. I conclude that two-thirds of the price increases with new models should be treated as quality growth. This implies that CPI inflation for durables has been overstated by almost 2 percentage points per year, with quality growth understated by the same magnitude.