My advice would be this: Aside from products where quality differences can be plainly figured (both goods trading side-by-side, with differences clearly identified), drop the hedonic adjustments. But those shortcuts bias the calculation of the CPI downward. They have to, in order to get their jobs done. It is tough, and I know they have to do it for a wide number of reasons. They sample a smallish portion of what goes on, often on a static basket of goods that is infrequently updated, and try to generalize to the large, diverse, dynamic economy that we live in. Capitalist economies are diverse and dynamic. With a little sympathy toward those who calculate the CPI, I will say that I think their job is tough. Any comparison of features will overstate the perceived improvement, because for most needs of companies and individuals, computers run about the same - marginally improved hardware, and software that eats up a lot of resources, leading to little extra benefit. The consumers may say in their heads, “I only buy one bottle per day, and I don’t need the extra four ounces, but I have to buy one bottle of my favorite soda I can’t buy 80% of a bottle, and this is it.” The consumers aren’t 6.7% worse off in this example the inflationary effect should be higher. Consider a soft drink company that changes its bottle size from 16 to 20 ounces (25% bigger), while raising the price 33%. When features / ingredients are downgraded, the companies say little to nothing.īut mere technical measurement of quality changes does not capture the perceived quality difference to the consumer. The old product disappears when the new product appears, and when features are upgraded, companies loudly announce the enhancements (and in a soft voice, the higher price). At that point, the economist can take the prices paid and quantities bought of both goods, and make a hedonic adjustment.īut typically, that doesn’t happen. One requirement for doing hedonic adjustment right is that both the new and old goods must be offered side-by-side for a while, and that people can clearly tell the differences between the old and new goods. I have troubles with how it works in practice, and I wonder whether it can be done properly at all, as I wrote in my RM article Solid Foundation for Inflation Fears. I don’t have troubles with the theory behind hedonic adjustment. How much impact does substituting cheaper ingredients in prepared food have on the CPI if the product price does not change? No effect, but you are likely getting a lower quality good. Good article, but I’m here to draw a different conclusion than the article did. ![]() On Saturday, the Wall Street Journal had an article called Food Makers Scrimp on Ingredients In an Effort to Fatten Their Profits.
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