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Hedonic adjustments, fake and gay?
There's been a lot of talk about a U.S. "vibecession" lately. In the last couple of years, incomes have risen, unemployment remains minuscule, the stock market is roaring, and inflation has returned to normal levels. Yet, when polled, Americans remain gloomy about the state of economy. What gives? Why aren't we partying like it's 1999?
The usual suspects are out as usual, telling us to ignore our lying eyes, pointing at charts, and saying ackchually, the economy is doing quite well thank you very much.
I don't think so.
Larry Summers, former Treasury Secretary and consummate insider, had this to say:
"We show that if we make an effort to reconstruct the CPI of Okun’s era [1970s]—which would have had inflation peak last year around 18%, we are able to explain 70% of the gap in consumer sentiment we saw last year."
18% annual inflation is quite a lot. The official number peaked at only 9%.
Of course, none of this is news. People have been complaining about inflation numbers being fake for awhile now. A can of Campbell's soup cost $0.40 in 2000, but rose to $1.23 by 2023. That implies an annual inflation rate of 5%, vs. the official number of only 2.5%. And while this is just a single product, similar patterns have held true among other immutable products like gasoline or Coca-Cola.
On the other hand, there are hedonic adjustments. Unlike a Campbell's soup can, a TV in 2023 was nothing like a TV in 2000. It's better in nearly every way. So even though a family might still spend $500 to buy a TV, the quality has increased by 10x, so the price had reduced by 90%. Or something.
You can easily see how inflation numbers get fuzzy. One thing I don't think CPI is taking into account is the degradation in the quality of services post-pandemic. The price of an HVAC repair is skyrocketing. But the quality is plumetting. Does CPI measure that? Do they measure being guilted for tips at fast food restaurants and convenience stores? Do they measure waiting in line at the pharmacy for 45 minutes because there is only one harried pharmacist on duty? Do they measure being bombarded with ads where previously there were none. Do they adjust (up or down) when TikTok becomes 5% more addictive? I doubt it.
Nor could they. I doubt any of this can be measured.
And so we return to the can of soup and opinion polls. Maybe they're not such a bad measure of inflation after all. And I think they will show what many of us feel intuitively: that the economy is doing a lot worse than the official numbers show.
Relatedly, does CPI measure shrinkflation? Like some of the items in a commodities basket are obviously measured by size, but questions like ‘how much is a loaf of bread’ are partially disguised by loaves of bread getting smaller.
Hmm... Good question. You'd have to dig deeper into the data. My guess is that they can handle it in some cases, but not others.
The further you get away from "12 oz can of Campbell's soup" the more fuckery is possible. It truly is garbage in, garbage out. And I think, for the record, they are doing their best. It just gets so complicated so quickly.
https://www.bls.gov/opub/btn/volume-12/measuring-shrinkflation-and-its-impact-on-inflation.htm
Yeah, makes sense. I believe that the people making the numbers are doing their best and avoiding obvious failure modes. If the "family size" cereal shrinks from 64 oz to 48 oz, I'm sure they can handle that.
If the hotel stops making your room up every day, I doubt they factor that in.
If my accountant takes 5 days to respond to an email instead of 1 day, I know they aren't making hedonic adjustments.
The idea that things should stay the same price is inherently flawed anyways.
We are constantly making vast technological and logistical improvements to just about everything. We seem to assume that all price changes are caused by inflation or deflation when, in a properly functioning economy, everything but services should be steadily getting cheaper.
Of course. But nearly 80% of the economy is services.
Let's say the quality of my TV gets slightly better (4k to 8k) but I can't talk to my doctor on the phone anymore. Has my life gotten better or worse?
This is Baumol's cost disease in a nutshell. The things that can be improved have been improved and now we're left with services which depend on the average quality of the American worker - which is clearly decreasing in many sectors.
In some ways, we're a victim of our own success. The low hanging fruit has been picked.
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