"Hedonics".  Doesn't it sound great?  Sort of like a combo between "hedonistic" and "ebonics".  Or something.  Very luxurious.  Sumptuous.

Misleading.

What is "hedonics"?

Weeeelll, while I was perusing links resulting from a Technorati search on "housing bubble", I ran across a grand rant on a one-post blog.  It was howling about the "scam" that is the current CPI (consumer price index), and how a variety of dubious (in that poster's eyes) statistical chicanery was resulting in a CPI figure that is far too low.

The question was:  Why, if the economy's doing so well and the CPI is rising so slowly, do people feel so horribly crunched when it comes to dollars and cents?

Hedonics is an approach to figuring out what to do when an item in the CPI shopping basket drops off the market.  As an example, say that five years ago, one of the items was a 750MHz PC with a 750MB hard drive, a CD/RW drive, a 17-inch monitor, 2 USB 1.0 ports, blah, blah, blah.  Take a look at any well-known computer retailer, and you won't find such a beast mentioned.  These days, we're all up at 2GHz, we've got multi-gigabyte hard drives, DVD/RW drives, we've got 4 or 6 USB 2.0 ports, etc.  How do you compare the two?

One way is to take a comparable item and match it for a few months, then phase out the old item.

The other way is to use hedonics to examine a number of factors in the new and improved version.

All way cool, actually, and interesting to a geek like me (I had to compile a stock index for a few years for a newsletter, and had to figure out what to do when a stock split or consolidated, and got a very good education in the decimal representation of 8ths).

The problem is that the actuaries factor in such intangibles as increased performance and more variety, then use that factor to decrease the perceived cost.

So if you're looking at a 25-inch color TV set with remote control, say that it goes off the market and is replaced by a 25-inch flat-screen color TV.  Hedonics could say that the implicit value of flat-screen versus curved screen is enough to offset some of the cost.  Or, say that the car model which increased in price $2,000 over the course of a year now features a GPS system, figured at costing $1,250, as a standard feature.  So, the cost rise is figured at $750...but you, dear car buyer, are still going to be paying more.

It does work the other way, as well, but, according to some things I've read, not as much in the decreased cost version as in the increased version.

Housing costs (30% of the CPI) are factored into the CPI by looking at monthly rentals, not mortgages.  The folks at the Bureau of Labor Statistics, who compile the CPI, claim that this actually results in an incrase in the CPI because they factor in aging...on the other hand, with housing prices having gone up double-digits in each of the past few years, the impact has been to deflate rentals.

Health insurance premiums aren't tracked at all (their explanation is that given the difference in coverages, out of pocket payments, and outcomes, it is extremely hard to compare such--which I can believe).  In the end, though, the consumer knows that health-care costs are rising rapidly, no matter what the CPI says.

My!  It's been very interesting to read!  I am in no way an economist, so I've probably gotten some of it wrong.  But it all seems somewhat dodgy to me now...

Inflation debate brews over intangibles at the mall

Technorati: Economics, hedonics, CPI