Hedonic adjustment killed inflation expectations

[RuleNumberOne]

I think hedonic "adjustment" was introduced in the late 1990s. My theory without examining any data is that these "adjustments" killed reported inflation.

 

CPI manipulators can always find some quality improvement in autos, housing, and anything else.

As smartphone, Internet bandwidth, laptop prices go down, they offset price increases in other areas.

 

They can come up with any "coefficients" they need to peg inflation at 1.5%. The Fed keeps rates low in response and a great bubble gets inflated somewhere.

[FiveSigma]

See the following paper by BLS:

 

https://www.bls.gov/opub/mlr/2006/05/art2full.pdf

 

 

"While hedonics is an important technique for particular

categories, it is important to emphasize that it is used for only

a small part of the total index. Moreover, research from the

CPI-U Research Series (CPI-U-RS) shows that its impact on

indexes often has been modest and of uncertain direction.

The CPI-U-RS was created to provide a methodologically

consistent index; to this end estimates were made of the

quantitative index of methodological changes in the CPI since

1978.34 These included changes to quality adjustment

procedures. The estimates in the research series are taken

from simulations described in the research for each item

category for which hedonics was implemented."

 

"In table 5, a negative sign indicates that the change to

hedonic adjustment has caused the index to rise more slowly

(or decline more rapidly) than it would have if previous quality

adjustment procedures had been used. The inconsistency of

the effect is exemplified by the fact that the impacts for

washers and dryers have the opposite sign. While the switch

to hedonic adjustment had a significant effect on several of

the individual item categories, it is important to note that the

net effect on the All Items index was negligible. This is

because the direction of these effects varied and the items in

question had such a small weight. (The total relative

importance of items for which hedonics have been

implemented since 1998 is less than 1 percent.) Indeed, the

net effect of hedonics from 1999 onward (which excludes

personal computers, but includes televisions and all later

categories) on the All Items index is estimated to be less than

1-hundredth of 1 percent per year, specifically +0.005 percent."