![]() So what exactly is hedonic quality adjustment? Let’s ask the BLS: quality / total-utility metric over time. The CPI index is not a cost of living measure! It is a hedonically-adjusted basket of assumptions that attempts to track some sort of cost vs. The data has been sliced and diced like crazy. organization charged with preparing the CPI data. The source of the data on that chart is the BLS, the U.S. So all those rising prices are being offset by all those falling prices and people are just noticing the prices that go up, right? Nope. Quite often when people go to Twitter to rail about CPI, they say something like “Man, my cost of living doesn’t look like that! My tuition and health care costs are skyrocketing!” Savvy statisticians then respond with a flurry of charts that look like the one at right and say “the plural of anecdote is not data” or something similar. The sequence is easily visualized.With the intense sturm und drang around inflation right now, expect the next six months to yield intense hand-wringing and chin scratching over CPI, PCE and … hedonic quality adjustment. Later on in the product cycle, the product will mature and eventually will increase in price more rapidly than the average product of its class. For instance, the VCR was introduced in the late 1970s at a price of $1,000 with clumsy electromechanical controls by the mid 1980s the price had fallen to $200 and controls were electronic, with extensive preprogramming capabilities. Soon improvements in manufacturing techniques and increasing sales allow prices to be reduced and quality to be improved. A typical new product is introduced at a relatively high price with sales at a low volume. Many critics of the CPI contend that BLS introduces new products too late and tracks outdated products too long.(5) The advisory commission describes the "new product" bias as follows: A pervasive phenomenon called the "product cycle" is critical in assessing the issue of new product bias in the CPI and applies as well to new models of existing products. As pan of the major CPI revision that went into effect in January 1987, BLS included VCRs in the CPI market basket and they became pan of the Video Products Other Than Televisions item stratum (the lowest level of item aggregation for which the CPI calculates indexes).(4) The inclusion of VCRs in the CPI came almost a decade after their introduction to the marketplace. We compared it with the published CPI index to obtain an estimate of the quality change bias for VCRs. The resulting quality-adjusted index is, ideally, free of quality change bias. These adjusted VCR price changes are used to calculate a quality-adjusted price index. In this study, the hedonic technique is used to estimate (implicit price) values for video cassette recorder (VCR) characteristics, and these estimates are used to quality-adjust VCR price changes when a new VCR model replaces an older model in the CPI sample. that present particularly difficult measurement problems, but the quantitative evidence is very fragmentary and the BLS is reluctant to speculate as to what the magnitude of any bias component might be."(3) The Bureau of Labor Statistics responded to the advisory commission's bias estimate acknowledging ". The category that contributed the most to the quality change bias estimate was the Appliances Including Consumer Electronics component. Rapidly changing consumer electronic goods present particular difficulties when compiling a constant quality CPI hedonic methods are used to quality-adjust price change for video cassette recordersĪre there any "low hanging fruit" (or benefits) to be harvested from the use of hedonic methods to quality-adjust video cassette recorder (VCR) prices?(1) According to the December 1996 Final Report of the Advisory Commission to Study the Consumer Price Index (CPI), an upward bias of 0.6 percent per year in the CPI is attributable to unmeasured quality change and new goods.(2) To estimate the biases attributed to quality change and new products, the advisory commission divided the CPI'S market basket (the set of all consumer goods and services) into 27 major categories.
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