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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.
I remember back in 2008, the great recession, there were all sorts of conspiracy about inflation and how the government was rigging the official numbers. There were various efforts to come up with alternative measures, eg "shadowstats," but none of them came to much. I haven't seen anything like that this time, just a lot of grumbling from people who "feel" the economy is bad despite the official numbers looking good.
Maybe inflation just isn't something you can measure definitively? So much depends on what you choose for that hedonic adjustment. EG: https://www.nber.org/digest/20239/correcting-quality-change-when-measuring-inflation
Like, if I enjoy going out to eat at restaurants and collecting old cars, the inflation rate has been absolutely horrible. But for buying consumer electronics and gasoline, it's not bad at all, or even negative. Rent completely depends on your location. And some of the "improvements" are kind of subjective, like, do you really want a smartTV that requires a wifi connection and a subscription? Some people do, some don't.
Maybe we could come up with a personalized inflation rate, depending on your location and lifestyle?
I think this is pretty much it. The more I've been exposed to the problem, the more I've come around to the idea that measuring inflation is every and always a harder problem than you think. This remains true even after you've updated to thinking that it was harder than you thought before. I listen to a lot of EconTalk, and it comes up there time and time again. Best of Econtwitter just referred to the original Summers statement with, "file under: measuring inflation is always even more complicated than you think." You just have to make an obscene number of choices in the process, and they're kind of always having to deal with new products in an ad hoc way.
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