[quote=pri_dk][quote=Scarlett]I am surprised nobody posted this yet:
[WSJ Article]
[/quote]
Got halfway through and quit after it lost all credibility:
Or consider the case of Apple computers. We all know Macs are expensive. And we know Apple doesn’t discount. The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?
Ha. Not according Uncle Sam. Using a piece of chicanery called “hedonics,” Uncle Sam calls this a price cut. His reasoning? You’re getting more for the money. Today’s $999 Mac is lighter, fancier and faster than last year’s $999 Mac. So the government calculates that the “real” price has actually fallen.
How’s that work in the real world? Try it. Go into your local Apple store and ask for 50% off thanks to hedonics.
According the the logic above, today’s typical laptop computers should only cost a few dollars.
How about this? Go on eBay to get the the price of three year old computer and make a true “Apple to Apple” comparison (pardon the pun.)
Pro Tip: If you want to make an argument for inflation, don’t use computers as an example.[/quote]
I think the Author may not have used the best example.
We he is trying to say is we all know computers, tvs and all electronics have gone down in price but due to the magic of “hedonics”, according to the government, they have gone down more.
Virtually anything that has quality improvements has the effect of driving prices down, ACCORDING TO THE CPI Index.
Forget about computers, lets talk blenders. A blender 5 years ago at your local Wal-Mart was say….45.00, today it is 45.00. Now, according to logic, the inflation of blenders in the last 5 years was ZERO.
But now comes “Hedonics”. The blender 5 years ago has less features. The blender today has more features, it may even use less electricity.
The Government assigns value to all changes. So, even though the blender is 45 dollars today and 5 years ago, because of Hedonics, the government would publish information stating that the price of blenders have fallen say 20% in the last 5 years.
Again, it did not actually fall in price at the store, but the government concludes the blender today is better than the blender yesterday so hence they say it has decreased in price.
You can apply that methodology to computers as well.
The result is, when we get our inflation reports, the overall number seems shockingly low to us. The reason it is low is all these “price declines” in things that are actually the same price at the store are averaged into the CPIndex to make us believe inflation is under control.
TVs are about the same price as they were back in the 80s but because of “Hedonics” according to the US government prices are about 50% of what they were in the 80’s.
Why would the Government have any stake in understating inflation?
Well, if inflation was higher, the interest paid on the national debt would be higher. The annual increase to s.s. recipients would be higher, the increase to Federal retirees would be higher.
There are literally, Trillions of reasons for the Government to claim that the CPI is lower than it is.
