Tag Archives: CPI

About Those “Hedonic Adjustments” to Inflation: Ignoring the Systemic Decline in Quality, Utility, Durability and Service, by Charles Hugh Smith

The Bureau of Labor Statistics adjusts the CPI hedonically, for improvements in quality. How about those goods and services that have deteriorated? From Charles Hugh Smith at oftwominds.com:

The quality, durability, utility and enjoyment-of-use of our products and services has been plummeting for years.

One of the more mysterious aspects of the official inflation rate is the hedonic quality adjustments that the Bureau of Labor Statistics makes to the components of the Consumer Price Index (CPI).
The basic idea is that when innovations improve the utility (and pleasure derived from) a product, the price is adjusted to reflect this improvement.
So if television screens become larger, while the price per TV remains the same, the hedonic quality adjustment adjusts the price down when calculating the CPI.
In other words, since we’re getting more for our money–more quality, more features, more goodies, more pleasure–the price is adjusted down to reflect this. If a TV that cost $250 had a 19-inch screen in the old days, and now a $250 TV has a 27-inch screen, the price of TVs in the CPI is adjusted down to reflect this increase in what the consumer is getting for her $250.
So while a TV still costs $250 to the consumer, in terms of measuring inflation the TV is reckoned to cost (for example) $225, as the consumer is getting a larger screen for her $250.
In other words, the price of TVs declines when measuring for inflation, even if the retail price remains unchanged. This is how the official rate of inflation can be so low even as real-world costs keep rising.
If you read the above link, you’ll find the mathematical model used to reduce the price of products when calculating the CPI, i.e. the rate of inflation.
While the BLS website makes mention of the possibility that hedonic quality adjustments occasionally go the other way, i.e. quality has declined, it’s clear this almost never happens. “Innovations” are always improvements.
I propose we start tracking anhedonic quality adjustments, i.e. significant declines in quality, durability, utility and the pleasure derived from the product or service. (Anhedonia: inability to experience pleasure from activities usually found enjoyable.)