First, the goods that people actually buy change significantly over time. (In 1900 we bought a lot of oats to feed horses; in 1986 we bought a lot of gasoline to run automobiles. The per capita consumption of electricity in the United States has multiplied more than 135 times in this century.) Therefore, the more separated in time two dates are, the less meaningful in realworld terms is any relationship between them that is based on the CPI.

Second, inflation is by no means the only factor to affect prices over time, as a quick look at the mansion and the necklace again will demonstrate. Between 1917 and ) 1986 prices inflated about 8.5 times in dollar terms. Morton Plant’s mansion and Cartier’s necklace should ’ then each be worth about $10,000,000 today. But they are not. The mansion is worth much more, the necklace much less.

To put it another way, in 1917 $1,200,000 would have bought a fabulous mansion on Fifth Avenue or an equally fabulous pearl necklace. Today that much money will buy only a rather modest apartment on Fifth, but it will buy half a dozen fabulous pearl necklaces. The difference is caused by supply and demand.