Get into conversation with – or more likely, listen to a tirade from – one of those convinced that inflation is already out of hand and among the more incensed the hell of hedonic adjustment will pop up. Because, d’ye see, they’re lyin’ to us, lyin’ I tell ya!
A computer hasn’t gone down in price – they’re still $2 grand, see?
The statistician trying then to point out that well, yes, but a $2 grand computer now does rather more than that $2 grand one in 1984.
At which point razors.
Some time in the late 1990s I went to California and as I’m
a cheapskate interested in economic phenomena I took note of the way that supermarket cards – then fairly new over there – and shopping coupons interacted. A new product might arrive on the shelves and the manufacturer would be subsidising the supermarket into inveigling people into trying it through a lower or discounted price. You got this by flashing your supermarket card at the lady working the cash register.
There was also the older system of coupons which traditionally arrived with your newspaper. The same new products were likely to be graced with a money off coupon. The interaction of the two systems could lead to some oddities.
Like, Gillette brought out the three blade razor. To someone who had just spent 7 years in Moscow this is an absurdity but there it was. At something like $15.99 (the actual price is hazy at this distance) as well. A razor for the price of 16 happy hour beers? That’ll stay on the shelf then.
Except cards and coupons. The razor was discounted by $8 if you used your supermarket card this week only. But there was also a coupon for $8 off in the newspaper. So, what happens when you try to use both together?
I ran one razor through the checkout, alone and by itself. Presented the coupon and the card and was given a receipt. I paid nothing for the razor – and was a bit miffed I didn’t get the 1 cent change. I just mentioned this to SWMBO and she cringed at the memory from two decades back.
We’ve also just come back from Aldi, favourite discount supermarket. Where a pack of 5 razors was purchased and I noted that they’re three blade razors. It was €1.69 for the pack.
So, one way to run an inflation calculation is that three blade razors have gone from $16 to $1.69 (let’s forget currency adjustment here and the different number in the pack) which is quite a lot of nice deflation.
Real world calculations don’t work that way because the three blader wouldn’t be in the inflation calculation basket when it first came out. Few people bought them so they were not representative of average purchases and thus the price was not representative of average inflation. But at some point they were added to the basket and at least the latter end of that price drop has been part of the calculation of CPI.
That’s one reason why CPI always overstates real inflation – new products generally get added to the calculation only after their first significant price drops.
OK, but there’s our standard price calculation. This item, price change, that’s what we count, we’re done.
But there’s another thing we need to include. Back those decades the pack of cheap supermarket throwaway razors was something like those Bic one bladers. A knock off of them perhaps – at $1.69 (you know, -ish, to make the point here). Today’s cheap supermarket pack – and I did check, Aldi stocked nothing less than three bladers today – is of three bladers for $1.69.
Which is what hedonic adjustment is. The quality of the item has changed, even as the price has not. But this is a change in what we can get for our money so we’ve got to include it in our inflation numbers. So, we do.
Now, what the value of a three blader over a one actually is I have no idea. Nor, really, does anyone else so the statisticians
guess make a carefully evaluated estimate.
The point being that quality really does change and that needs to be factored into the inflation numbers. Hedonic adjustment isn’t some conspiracy to fool us all, it’s just a reflection of the real world out there.
Who knows, some of us might live to see the five blader being the basic minimum…..