Accounting for Quality Change

Behind every macroeconomic statistic’ are thousands of individual pieces of data, as well key judgment calls.

An Inflation Debate Brews over Intangibles at the Mall

To most people, when the price of a 27-inch television set remains $329.99 from one month to the next, the price
hasn’t changed But not to Tim Lafleur. He’s a commodity specialist for televisions at the Bureau of Labor Statistics, the government agency that assembles the Consumer Price Index, In this case, which landed on .his desk last December, he decided the newer set had important improvements, including a better screen. After running the changes through a complex government computer model, he determined that the improvement in the screen was valued at more than S135. Factoring that in, he concluded the price of the TV had actually fallen 29%. Mr. Lafleur was applying the principles of hedonics, an arcane statistical technique that’s become a flash point in a debate over how the U.S. government measures inflation. Hedonics is esse ltially a way of accounting for the changing quality of products when calculating price movements. That’s vital in the dynamic: U.S. economy, marked by rapid technological advances. Without hedonics, the effect of consumers getting more for their money wouldn’t et fully reflected in inflation numbers. But even as the Federal Reserve raises interest rates amid a recent uptick in inflation, many critics complain the hedonic method is distorting the picture of wh~t’s going on in the economy, They say hedonics is too subjective and fear it helps keep inflation figures artificially low-meaning the Fed may alreadybe lagging in its inflation-fighting mission. It’s critically important for consumers. business, the government and the economy as a wholce that ‘the CPI is as accurate as possible. The CPI is used to benchmark how much is paid to Social Security recipients, who last year received outlays of $487 bill-ion. It also plays a role in adjusting lease payments, wages in union contracts, food tamp benefits, alimony and tax brackets Bill Gross, head of the world’s largest bond fund, Pimco, caused a stir last fall by proclaiming that the way the CPI calculated amounts to a job by the government aimed at concealing the true rate of inflation. A key culprit. e said. was the C~J’s growing reliance on hedonics Inflation watchers at the statistics bureau say critics exaggerate the significance of hcdonics, noting that it’s used in only seven out of 211 product categories in the CPJ. In most of those, officials say. hcdonics actually magnifies price increases rather than suppressing them. Take housing, which makes up about 30% of the  The bureau says hedonics actually helps boost the housing component of CPl. In order to take into account the aging of housing, and presumably falling quality that goes with it, the CPI applies a form of hedonics that links the age of a housing unit to rents. If someone is paying the equivalent of $500 a month in rent for several yea.s, the rent has actually gone up as the unit ages and becomes less desirable, according of tile government The hub of this effort is a warren of beige-walled cubicles at the Bureau of Labor Statistics a few blocks from the Capital Here 40 commodity specialists hunch over reports with 85,000 price quotes that flow in from around the country every month. The numbers are gathered by 400 part-time data collectors. They visit stores and note prices on the items that make up the basket of goods in the CPI, ranging from ladies’ shoes to skim milk to microwave ovens. One of the biggest challenges in this process is finding substitutes for products that’disappear from store shelves or change so much that they are hard to recognize from one month to the next. With TVs, for instance, data collectors find the models they priced the previous month missing about 19% of the and over the of wear.

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