I'm Trying To Understand Hedonic Adjustments
May 11, 2021·13 comments·In Brief
Your cost of living feels like it's skyrocketing. The government says inflation is mild. Both things can be true because CPI isn't measuring what you think it's measuring. The gap between what people experience and what the inflation index reports isn't a misunderstanding. It's built into the system.
- A Honda Accord cost $12,000 in 1990 and costs $25,000 today. The BLS reports new car prices as essentially unchanged over 30 years. Neither number is wrong. They're measuring different things, and reconciling them creates a logical pretzel.
- When a product changes, the government doesn't record the price increase. Instead, statisticians use regression models to estimate how much of the price difference comes from added features. That portion gets subtracted from the price change. Quality improvements disappear from inflation measurements.
- Nearly half of all items in CPI go through this hedonic adjustment. A car with better airbags, computer systems, and safety features doesn't cost more in the inflation index, even though you paid more for it. The improvements are treated as free.
- The system is asymmetrical. When products get worse, they don't trigger upward adjustments. An airline that removes carry-on bags and crams in extra seats doesn't see its prices adjusted higher for reduced quality. Only improvements get hedonic treatment.
- CPI is used to adjust Social Security payments and price inflation-protected securities, but it's not actually a cost of living measure. The distinction matters because people who rely on CPI adjustments are being compensated based on a number that systematically understates what they actually spend.
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Comments
Another hedonic adjustment is how much more pleasurable life is in 2020 than it was in 1990.
CPI is cost of living any time that making it such keeps the government from paying out more of our money to us. All other times it’s definitely not cost of living. Schrodinger’s CPI.
The truth is what we need it to be —-and this , to me, is the biggest example of all. The real inflation rate cannot be known - the Government’s solvency rests on it.
More and more missionary’s are speaking on the subject and it’s the thing that can bring the whole house of cards down.
Of course they and their renfields in the media will blame the markets and capitalism for the crash and use the whole crisis to consolidate their power. Our road to serfdom will then be complete.
First question: who benefits from CPI as measured? Second question: who benefits from CPI being under reported? Third question: which societal group has had their share of national income under structural pressure over the post Volker years?
Wouldn’t evenly applied hedonic quality adjustments increase the adjusted ‘cost’ of goods which get worse in quality? I’ve never heard that flow rate limiting shower nozzles which cost the same dollar value as good shower nozzles had a huge upward hedonic ‘cost’ adjustment.
Ditto for paper-thin jeans, un-flushable toilets, clothes dryers you have to run three times per load, bloatware-encrusted cheap computers, the thing in cars that beeps at you when it’s angry…
Rather than accept the entire premise and argue with the implementation, I’m going to reject the premise that hedonic quality adjustments are a valid way of measuring constant standard of living. Fortunately, there’s an even simpler reason why we can reject the entire concept. If you assume that overall happiness remains constant across this period of hedonic growth, there’s no reason why we should accept a downwards ‘cost’ adjustment.
Happiness associated with material goods is largely zero-sum. Humans look to those around them for cues about how valuable our possessions are. It doesn’t really matter to my day-to-day life that I live better than Louis XVI if my neighbor gets a new car and I’m still driving my college POS.
Furthermore, we still have to pay the prices out of our pocket. Additionally, as one gentleman memorably put it a few years ago, “we can’t eat iPads!”.
Accepting this simplifies things a lot. Ignore the hedonic adjustments, just do an apples to apples comparison. I’d suggest percent of median income; real income runs into problems if CPI is incorrect. Lets call this new measure subjective inflation and see what it tells us.
I always thought that would make a great thesis for some graduate student.
My God is this just beautifully written and 100% correct.
Thank you!
An under-appreciated issue here is how CPI must be rigged to damp feedback effects. When payments are indexed to inflation metrics (such as social security and union rates), and good/service costs are indexed to inflation expectations via consumer price increases and contractual rate adjustment schemes, you get a self-reinforcing feedback loop. Higher costs → higher income → higher costs. Accurate inflation-measuring combined with automatic contract indexing makes the system dynamically unstable from a control-theory standpoint. It is thus mechanically necessary for system stability that either the inflation adjustments don’t fully compensate for measured inflation, or the inflation metric systematically under-reports real inflation.
Everybody seems to have forgotten the CPI system was DESIGNED to under-report cost of living inflation.
Is that after adjustment for COVID?
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