Hedonic CPI Disinflation
Statistics can be abused with the best of intentions, but the art of hedonics takes inflation jiggering to a new level. I'm not a statistician, if you want to read the underlying mathematical justification for adjusting down "apparent" inflation in textbooks, it's on the BLS website. The way I read it, the logic goes something like this.
Student A pays $30 for a textbook in 1980. Student B pays $150 for a textbook for the same course in 2007. An idiot like me would look at a 5X price increase and say, "That's inflation." But the statisticians introduce a hedonic adjustment. Rather than allowing that the required course text is a necessary expense for both students A and B that can't be avoided, the statistician tries to look at the intrinsic value of both textbooks. If the 2007 textbook has more pages, uses color illustrations, includes links to a website, it may be judged to be twice as valuable as that 1980 textbook. So, the rise in price is no longer 5X over 27 years, it's 2.5X.
The hedonic adjustments to the CPI components offer yet ivory tower look at inflation, or disinflation, which they tend to produce. Anybody who has purchased a washing machine in the past ten years can tell you that they are no longer built to last ten years, but frequently drop dead within a few months of the warranty expiring. But a smart statistician would be more inclined to look at the energy and water savings, and the computerized controls, and declare that the new washing machine is intrinsically more valuable than the old washing machine.
Bill Gross of Pimco claims that hedonic adjustments affect nearly 50% of the CPI components. As a fixed income man, Gross has every reason to care more about CPI disinflation than your average fund manager. He also has the resources to have had some smart people study the problem. Personally, I don't buy the whole concept of hedonic revaluation. A person who needs a car to drive to work needs a car to drive to work. If that person buys the minimum (lowest cost) car available, and is forced to pay more due to computer controls, air bags, and other modern improvements, the difference between the cost of the first car and the second car is inflation. If that person's wages are going up slower than these hedonic adjustments, that person is losing money.
This is where Greenspan, Bernanke and various politicians get up on the soap box and talk about education. It seems to be the responsibility of every American to become an over-educated policy wonk, a sort of a hedonic improvement in humanity, in order to earn a higher salary. Ergo, the solution to inflation is for all of us to become economists. I can't see any flaws in the argument, but I may be losing my reason along with my money.
Student A pays $30 for a textbook in 1980. Student B pays $150 for a textbook for the same course in 2007. An idiot like me would look at a 5X price increase and say, "That's inflation." But the statisticians introduce a hedonic adjustment. Rather than allowing that the required course text is a necessary expense for both students A and B that can't be avoided, the statistician tries to look at the intrinsic value of both textbooks. If the 2007 textbook has more pages, uses color illustrations, includes links to a website, it may be judged to be twice as valuable as that 1980 textbook. So, the rise in price is no longer 5X over 27 years, it's 2.5X.
The hedonic adjustments to the CPI components offer yet ivory tower look at inflation, or disinflation, which they tend to produce. Anybody who has purchased a washing machine in the past ten years can tell you that they are no longer built to last ten years, but frequently drop dead within a few months of the warranty expiring. But a smart statistician would be more inclined to look at the energy and water savings, and the computerized controls, and declare that the new washing machine is intrinsically more valuable than the old washing machine.
Bill Gross of Pimco claims that hedonic adjustments affect nearly 50% of the CPI components. As a fixed income man, Gross has every reason to care more about CPI disinflation than your average fund manager. He also has the resources to have had some smart people study the problem. Personally, I don't buy the whole concept of hedonic revaluation. A person who needs a car to drive to work needs a car to drive to work. If that person buys the minimum (lowest cost) car available, and is forced to pay more due to computer controls, air bags, and other modern improvements, the difference between the cost of the first car and the second car is inflation. If that person's wages are going up slower than these hedonic adjustments, that person is losing money.
This is where Greenspan, Bernanke and various politicians get up on the soap box and talk about education. It seems to be the responsibility of every American to become an over-educated policy wonk, a sort of a hedonic improvement in humanity, in order to earn a higher salary. Ergo, the solution to inflation is for all of us to become economists. I can't see any flaws in the argument, but I may be losing my reason along with my money.
posted by Morris Rosenthal | 7:38 AM
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