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Hedonically Unadjusted

A quick note.  An ONS report today on hedonic quality adjustment carries the following table showing the items for which hedonic quality adjustment is performed in the CPI basket:

Table 2: Hedonic items in the UK consumer price statistics

Item Introduction
PCs 1996 CPI – 2003
RPI – 2004
Digital Cameras 2004 2004
Laptops 2005 2005
Mobile Phones 2005 2007
Smartphones 2011 2011
PC tablets 2012 2013

Source: Office for National Statistics

And that’s it!  (For background on hedonic quality adjustment, the BLS has a nice FAQ.)

I was very surprised to discover that hedonics are only applied to such a small set of items.  The ONS note that the US, by contrast, adjusts for items described as “Clothing, Footwear, Refrigerators, Washing Machines, Clothes Dryers, Ranges & Cooktops, Microwave Ovens, TVs, DVD Players”.

The ONS say they find hedonics complicated and expensive; for goods which are now weighted less than than 1% in the CPI basket, it’s hard not to be sympathetic:

In practice hedonics has proven to be a resource intensive process in the ONS and therefore a costly method. This is due to a number of factors, including the technical nature of the method and the large volume of price and product attribute data that needs to be collected and managed for the production of each hedonic model. Additionally, each hedonic model is updated several times a year to stay relevant to technology changes (for example the introduction of Windows 8 in 2012) which compounds the work involved.

Those who believe that “the price index” captures something real, tangible, and objectively measurable, should be wondering how it is possible to make an objective assessment of the change in PC quality taking account of the “introduction of Windows 8”!

Categories: Inflation
  1. jamesxinxlondon
    March 13, 2014 at 22:49

    That’s so poor, typed he on his iPad at the station on “oh so slow” 3G. Having read his free Evening Standard, from his new SW Trains carriage. Before watching the recording of the football on his Sky plus box in HD when he gets home. Or perhaps not and just catching a netflix film via his new cable broadband connection. Nothing changed much since 2004 there for the ONS to waste time on.

    • March 13, 2014 at 23:08

      Very good James! :)

      You may then be surprised to hear that the price of “TELEPHONE AND TELEFAX EQUIPMENT AND SERVICES” in the CPI basket has risen 17% since 2008! That sector includes smartphones, fixed line phones, broadband subscriptions. Maybe it is the rising cost of those “telefax” machines – so expensive nobody buys them any more?

      It’s a good thing we don’t rely on this data for macroeconomic policy.

  2. W. Peden
    March 14, 2014 at 14:47

    “It’s a good thing we don’t rely on this data for macroeconomic policy.”

    That would be utterly hilarious if it wasn’t false. As it is, it’s just hilarious.

  3. james in london
    March 14, 2014 at 17:18

    Having read the ONS document I get your Windows 8 joke. My kids told me Windows 7 was a failure, so should have produced a negative hedonic adjustment, I suppose (another joke?).

    Interesting to see Netherlands, Denmark, Finland (home of Nokia) do no hedonic adjustments and Sweden (cradle of advanced engineering) do it just for clothing and shoes. Has anyone told Lars Svensson? It’s incredibible, but clearly true. Luckily they all have such hhigh inflation rates it doesn’t matter (irony now).

  4. jamesxinxlondon
    March 14, 2014 at 20:16

    Oops. I stand corrected by my kids. Windows 7 was good. Windows 8 (version 1.0) was rubbish. Windows 8.3 or something (they’ve lost interest in telling me) was OK. But they say they will use Linux when they go to work. Hopefully, for the ONS.

    • March 14, 2014 at 20:46

      Windows 8 being the rubbish one makes the joke about adjusting for quality work a lot better. :)

  5. W. Peden
    March 14, 2014 at 21:54

    Windows OSs tend to follow the Star Trek rule: odd numbers are bad, even numbers are good. So Windows 98 was an improvement on Windows 95, but Windows ME was very frustrating and crash-heavy. Windows XP was good, but Vista came with so many bad reviews that I kept with Windows XP until Windows 7. I don’t know much about Windows 8, but I haven’t heard good things.

    Similarly, Star Trek movies (until the franchise became consistently bad and had to be shelved) could be great if even and terrible if odd, with only a few debated borderline cases (Generations, First Contact, Search for Spock).

    (An above-average knowledge of Star Trek and using computers from a young age are not disconnected facts. Or laughing out loud at a blog post on price indexation and macroeconomic policy, for that matter.)

    Quite how one would do hedonic calculus for movies is beyond me…

    • jamesxinxlondon
      March 14, 2014 at 22:48

      I guess the talkies were an improvement on silent movies. But as you get an ageing population it makes no difference. Eh, what?

    • March 15, 2014 at 15:24

      I was thinking the same thing about those West End shows, where the prices seem to double every few years. What about the quality of sets, scores, scripts and acting?

      • ChrisA
        March 17, 2014 at 02:35

        One thing interesting to me is how to handle inflation for positional goods (like perhaps West End Shows). As people become wealthier, they bid up the cost of scarce goods. Housing is another example of this, in certain areas (there are only so many houses in Kensington for instance). How should monetary policy handle this? Once way to control these sorts of prices rises is to keep everyone poorer than they would be otherwise, but that doesn’t seem a very good approach. You can also move allocation from a market mechanism to a rationing system, or perhaps a lottery system. But this is perhaps inefficient, since the scarce goods then do not go to those who would value them most. So perhaps the best policy is to ignore these sorts of issues and manage overall growth in the economy.

  6. March 18, 2014 at 08:30

    ChrisA :

    One thing interesting to me is how to handle inflation for positional goods (like perhaps West End Shows). As people become wealthier, they bid up the cost of scarce goods.

    Chris, it’s hard to imagine this is significant. I’m more concerned that we are mis-measuring inflation because of substitution in the opposite direction – the rise of Lidl/Aldi, Poundland, Travelodge, Ryanair/Easyjet, and so on.

  1. May 1, 2014 at 20:51

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