Author Topic: Hedonic adjustment killed inflation expectations  (Read 389 times)

RuleNumberOne

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Hedonic adjustment killed inflation expectations
« on: June 09, 2019, 07:43:46 PM »
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

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Re: Hedonic adjustment killed inflation expectations
« Reply #1 on: June 09, 2019, 09:54:24 PM »
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
."