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The Magic Of CPI: Watch How Economists Transform A 400% Price Increase Into A 7.1% Decline
Submitted by The Consumer Price Illusion
Manipulating the Consumer Price Index: Hedonic Quality Adjustments
Have you heard the one about CPI?
Suppose that a TV manufacturer retires a product and replaces it with a newer, better, and much more expensive one. If the new TV costs 5 times more than the old one, how can we manipulate the hell out of massage the price of the old TV to make it look like the price fell? By using the dark arts of econometrics, my son!
If you believe the public comments made by the world’s central bankers, the prices that consumers pay for items are not rising fast enough; in some places like Europe they worry that prices might actually fall (a tragedy for the possessing classes, as their manic one-way long bets might not work then). Central bankers are terrified of this outcome. Setting aside for a second the apparent insanity of this logic for your average consumer, who experiences price rises on a near continuous basis, let’s examine in detail one of the jokes gauges economists use for measuring prices: the Consumer Price Index (CPI).
Ostensibly, the CPI is a linear combination of the “prices” of things/stuff consumers could actually purchase weighted by a percentage that the “ideal consumer” spends on any particular stuff/thing in his “ideal” basket. The main problem here is that the “prices” used are not the prices a consumer would actually pay; instead the real price for an item is scaled by what the BLS calls a “Hedonic Quality Adjustment (HQA)”. The HQA was designed to solve a real world problem economists face: the market keeps pumping out new and better devices. In practice the HQA is used to artificially depress the prices used in the calculation of the CPI.
Intuitively, the HQA scales prices by their “perceived” quality. We’re not talking about human perception here, but that of a kitchen sink regression model created by BLS economists. Essentially it throws every quality an item might possess into a linear model and performs a regression of these qualities against the prices found in the market for a given product. The prices that feed into the CPI can be intuitively modeled as:
This means that as far as the CPI is concerned, prices can “decrease” for three reasons:
- The price actually decreases, holding quality constant
- The “quality” as measured by the Hedonic Quality Regression (HQR) could go up, holding price constant
- The “quality” goes up by more than prices go up (<<<<<< WE’RE HERE RIGHT NOW)
In a time of rapid technological development, the quality as measured by HQR will increase by orders of magnitude more than prices. Consider Moore’s Law, which correctly postulated that the number of transistors on computer chips would double every two years; prices can’t possibly keep up with that kind of quality increase (save for hyperinflation, more on that later).
The BLS neatly illustrates this effect with an example from their website (emphasis is mine):
Item A is a television that is no longer available and it has been replaced by a new television, Item B. The characteristics in bold differ between the two TVs. There is a large degree of quality change and there is a very large (400%) difference in the prices of these TVs. Rather than use the 400 percent increase in price between Item A and Item B, the quality adjusted rate of price change is measuredby the ratio of the price of Item B in the current period ($1,250.00) over an estimated price of Item B in the previous period – Item B’.
Here is an example of a hedonic regression model (including coefficients) for televisions.
This is just an OLS linear regression model. The dependent variable is the natural log of prices for televisions, the explanatory variables and their coefficients are listed in the table below (most are dummy variables)
Where PB,t+s-1 is the quality adjusted price, PA,t+s-1 is the price of Item A in the previous period, and is the constant e [SIC], the inverse of the natural logarithm, exponentiated by the difference of the summations of the ßs for the set of characteristics that differ between items A and B. The exponentiation step is done to transform the coefficients from the semi log form to a linear form before adjusting the price.
To put it another way, the HQR extrapolates a price for the new TV using the Hedonic Quality model estimated from the population of old TV’s
To derive the estimated price of Item B’, we use the following equation:
For our television example, [the equation above] looks like this:
When this quality adjustment is applied, the ratio of price change looks like this:
The resulting price change is -7.1 percent after the quality adjustment is applied.
Oh good! You see, my neighbor, John Q., thought that prices were going up and was about to riot in the streets because he couldn’t buy anything now. How relieved he was to live next to an economist and mathematician; I merely explained that even though he couldn’t afford the new TV (or anything else) it was actually less expensive once quality was taken into account. Boy was his face red. He went home and explained it to his wife and kids and they laughed and laughed about their mistake.
Few modern people would consider progress to be a bad thing. Quality improvements should be celebrated and technological change embraced. Yet when a policymaker says that she wants inflation to pick up and trots out the CPI as evidence, she doesn’t care whether that comes about from actual price inflation or quality decreases. Given the accelerating pace of technological improvements, it’s hard to imagine an outcome besides hyperinflation that will satisfy central bankers and their slavish dependence on indicators which have been so far abstracted from reality as to have little actionable value.
Alternatively, causing a complete economic meltdown by manipulating the price of money and inflating the mother of all bubbles will probably slow down technological development, so either way, fuck you John Q well played.
Since economists are largely concerned with “real” prices (actual prices scaled by inflation as measured by the CPI), any error in the calculation of real prices introduces a bias that propagates to every corner of economic thought. This is a central flaw in economics that largely explains the gap between actual human experiences (“Wow! Things are expensive!”) with central bankers gambling our collective future on fighting deflation.
More than likely the deflation is used as cover for the agency problem faced by central bankers every day. Most market practitioners know we are in a classic debt-fueled bubble initiated by wildly loose monetary policy – central bankers included. Given that the public will rightfully blame policymakers when the bubble bursts, no central banker wants to run the risk that it pops on their watch. That would make them look stupid, and might endanger their future lives as highly paid consultants. In that context printing endless supplies of money makes perfect sense.
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at least somebod is getting off theire asses somewhere and ruffling some feathers
http://rt.com/uk/202623-scuffles-london-march-anonymous/
Its very simple. All these economist have to justify there whole existence and the field they're in by trying to come up with something new. Coming up with HQA was just another way of making it seem as if they have value to society. I still have a dumb TV. To make it smart I can simply hook up my computer to it with one simple cord. I geuss with HQA the $10 HDMI cable used is really worth $200. To make my 2D TV 3D perhaps I'll just consume massive amounts of peyote and voila ... Well you get the idea.
Debasement ... it's everywhere!
How about a ZeroHedge inflation index, for fuck sake?!
If your income is fixed, comparisons on quality do not recognize that some things are affordable and some things aren't. In general, they know the percent of household income spent on housing, utilities, food, transportation, education infotainment, etc and use these in their weightings. ( http://www.bls.gov/cpi/usri09-102013.pdf )They know most people don't have a lot of flexibility in the cost of essentials for living. So when a $1,300 LCD TV replaces a $400 CRT, it isn't like one can downsize your housing or transportation costs that much to make a trade-off for the better TV. As prudent and responsible debt-averse people such as my family, we can either afford it or not.
I guess when it comes down to it, I'd rather not have Samsung spying on my family with their SmartTV, so they would have to PAY ME enough to take their TV to an electrician to have the mics and potentially cameras removed from the set.
Edit: S-video connector - LOL
Hey! Governments, manipulators and wonks!
I'm an INDIVIDUAL consumer, not a part of some "collective-generalization-about-how-much-people-spend-on-what"...
I'm not always mathematically rational. I buy USED stuff. I refuse to buy what they say I "need" or is "essential"... Sometimes I won't buy at all.
I'm an INDIVIDUAL, dammit!!!
The quality adjustment attempts to convert price to a value proposition. But, if you’re considering the quality of the new TV, don’t you have to factor in the decline in quality of programs playing on it? Once you properly adjust for CNBC and reality TV shows, the price of quality TV is up about 40,000% in the last ten years.
A simpler explanation. Last week, you bought a juicy, well-marbled steak from a prime young steer, for $40. This week, that steak was $60 but they had a dry, lean one from a 6 year old cow for $40. Next week, the first steak is now $80, the second is $60, but they have one from a 15 year old, skinny, decrepit bull for $40. According to the HQA economist, there has been no inflation because you can still buy a steak for $40.
Endeavor to persevere....
My steak is worth so much more with the antibiotics and growth hormones included
Here is a test question for Hedonics experts. Twenty years ago I paid $39 for a good Moen faucet. It was made in the USA. I expected it to last a lifetime, with perhaps a washer or two. Today you pay $129 for that faucet. It is made in China. After two years it corrodes into a leaky mass and must be replaced.
What is my hedonically adjusted price?
this is how the state allows the increase in pink slime content of ground beef along with a price increase to be booked as a decrease.
More expensive lower quality is actually a better deal in their eyes
You can defeat them all. Go tothe Salvation Army & pick up your choice of 12"~32" color CRT TVs for about $10...
Wonder what too many people doing THAT would do to the manipuation...!
That's easy. Gov would create a rebate program to trade in your old TVs which would be destroyed - just like cash for clunkers. Then that would allow the new TV prices to increase by 50% just like cars did.
I have a 42" inch plasma TV in my office here. I did not realize that prices had gone up so much on those TV's. I had no idea that the infomercial transmission device was appreciating to that extent. Here the whole time I was buying physical silver when I should have been buying TV's?
Well, that is why I do not offer investment advice. But I have a question to ask my fellow ZeroHedgers: How bad are they going to beat up on silver investors? I have been in this game for 15 years now and these "markets", if you can call them that, have gone full retard. I am still net positive and the fuckers won't flush me out but it has been brutal of late.
If this is how it is going to be, then maybe we need to get the credit cards out and take delivery. What are they going to do about it? They will trade those ETP derivatives short is what they will do. What a bunch of dumb fucks. We will just buy every PM we can until we have it all. Then we will ask the question we all want to know the answer to even though we already know the answer.
Show us the fucking money and not some fucking piece of paper.
These kinds of calculations are an art not a science, but using complicated-looking formulas makes them look scientific and intimidating. It's just BS.
..but there's 5 digits in the coefficient.
We had an awesome debate on the Hedge about inflation (real or imaginary) between Orly and Akak.
Neither of them post any more on the Hedge. But maybe they still read.
Orly defended the real deflation she perceived in the supermarkets for common produce. Akak defended the contrary.
I guess some debates are a recurrent theme.
Pity, I miss Orly.
If you can accept the fact that Washington would lie about flat screen tv's, can you expand your perspective to include that they lie about everything, including the size of today's global petroleum reserves?
There is no glut of oil. That's a lie.
The amount of proven reserves is a fraction of what actually exists. That's a lie.
That the sub-prime bubble and the world-wide economic obliteration it caused was, in point of fact, devised, planned, and inaugurated by elected American officials.
Why?
Why to curb the world-wide demand for oil, that's why.
Which is exactly where we are at today 6 years after ground zero. Diminishing Demand is upon us.
I prolly should zipit.
My Yugo and my BMW are great examples.
My Yugo has a round steering wheel. My Yugo costs $300.00.
My BMW has a more perfectly round steering wheel and costs $300,000.00.
Because of the quality improvement my BMW actually cost less than the Yugo.
I don’t have a Yugo or BMW in actuality, and so I have lost money by not going broke.
Conversely, when I’m, broke my quality of life will improve because I will eat only organic things like stolen apples and tomatoes: the quality improvement will make me a millionaire.
You can call me MR. Hobo!
I contend the primary reason that inflation has not raised its ugly head to become a major economic issue is because we as a society are pouring such a large percentage of our wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.
It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years. More in the article below.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....
So how do they do that kind of manipulation with a consumer staple, such as, I don't know, eggs, milk or rice? Kind of tough for that satisfaction quotient to be included in there unless they can say the egg has less cholesterol, milk has less fat and the rice is.....ricier?
I can think of one way.
HMM
Ok since you got fired, you work less, so that means you don't need as much rice, eggs and milk (because the amount of calories you burn has gone down), this means even if the price of these things goes up, it doesn't matter because you need less of them (since you are unemployed burning less calories), so on the occassion that you do get to afford one egg, you "enjoy" it more since you are used to starving.
SO the value of food is greater to someone who is broke and starving, than to someone who is rich and fat.
So its ok if the poor guy pays more as a % of his income for an egg than a rich guy does because the poor guy is getting more "value" out of the egg.
There you go.
I am on the fence or not if this is Evil.... but I am pretty sure this is how an economist would look at it, especially a NWO dictatorship Nazi Propaganda Data Generating Economist.
The proof of the model would be the simple fact that if you were stranded in the desert for 2 days without water, and you had no cash on you, but you had an ounce of gold , you would happily trade it for some water (even a cup) if you were thirsty enough.
The economist views this as an "equal" exchange, because the gold holds no value to you if you died of dehydration anyway, so the "water was actually worth the ounce of gold to you" and it was "equal value".
So the "quality" of the water went up.
Really if the economist was not a dishonest piece of shit , he would rename the word "quality" to "desperation factor".
Wow. You should work for the feds. You have a natural affinity for this stuff.
I agree that it's not evil per se. I think they are just so desparate to look good on something.....ANYTHING.....that they grasp for straws and don't think through what they're doing. What worries me is if they actually BELIEVE their own bullshit. Of course, knowing these idiots, they probably do and the thought that economic policy is being developed based on this rather curious way of calculating things gives me a good cases of the shakes.
Wow. You should work for the feds. You have a natural affinity for this stuff.
I agree that it's not evil per se. I think they are just so desparate to look good on something.....ANYTHING.....that they grasp for straws and don't think through what they're doing. What worries me is if they actually BELIEVE their own bullshit. Of course, knowing these idiots, they probably do and the thought that economic policy is being developed based on this rather curious way of calculating things gives me a good cases of the shakes.
When was the last time, that you bought something and you thought to yourself, wow the quality of this thing I just bought really went up from last time?
Because most of the time that I go out to eat at a restaurant or something, more often than not, the meal has shrunk 30% or the food took twice as long to come out, or it didn't taste as good as last time or w.e.
And most of the time that I have gone out and bought something that I have bought before, Its either exactly like it was before or not as good.
I will admit it has perhaps happened maybe once or twice that I can think of where something actually improved, but that never really happens without the price going up atleast a bit, but thats a very rare occasion.
The only thing you can count on staying around the same price is... eggs and consumer electronics (because no one has the$$$ to buy this shit anyway) and Chickens pump out soo many eggs that the price is somewhat inelastic. . . (just such a large supply of eggs, you cant possibly sell them all).
Everything else will go up in price and generally quality or amount of material put into everything will go down.
So this model of CPI is pretty much garbage, the speed of your iphone doesn't really mean jack shit when you can't afford something healthy to eat.
Try the Chinese-made nails sold at Home Despot. They cost more than old, reliable American-made nails from 20 years ago, but, when you hit them with a hammer, just a little bit off, they bend.
Now, all I need is a hammer and a piece of pine and I'm a modern-day Uri Geller. That's what I call improvement.
One of the primary reasons I have switched to using only a nail gun.
For some reason, hammer heads are not made flush anymore (am I the only one who remembers when a hammer head was considered "unsafe" to use when it gets rounded?) somehow now they come out of the factory rounded and mushroomed.
And nails... yes I agree.
How about those "great quality" screws? you know the ones where the heads "twist" off conveniently when the screw is 70% screwed in? I guess all the extra calories you burn rebuilding your entire project because of faulty tools and screws equates to "higher quality" lol
I was just in Home Despot last night
When the fuck did washers triple in price??
They were always 4-5 cents
Now they're 12-18 cents
That adds up quickly
Can't imagine the cost to build anything anymore
hahaha "Home Despot" how fitting.
HAHAH washers . . . yea I have resorted to simply drilling holes through nickles instead, sometimes you just need a freaking washer to act as a spacer.
Nickles work wonders, dimes sometimes too for those small projects.... quarters when you need it to actually hold up for a while.
Foregin currency works well also, I still have a few Greek Drachmas around, I think they were made of bronze at the time, but they are the size of silver dollars.
When its cheaper to just drill a hole through 5 cents instead of buying a washer for 12 cents you know the world is going to shit.
http://s7.postimg.org/en0nr5517/image.jpg
It came down to walking four blocks to buy some over-priced washers or . . . o look a quarter on my desk.
This is a three monitor mount bolted to a wall in my basement.
I wonder at what point it will get cheaper to just wallpaper your house with currency instead of actually buying wallpaper? ;P
Haven't been to Home Depot in a long time. They treated me like shit, oh, 7 times in a row, then I decided perhaps they don't want me to shop there. Used to go to Lowe's, but then they started playing Phil Collins shit "please kill yourself" and ignored me at the counter so ... back to the local hardware store. Well, that's life in the U.S.A. Totally fucked.
I used to get mad at all the chinese made crap. Now, I understand that its rational for them to do the bare minimimum when they are only getting paid in toilet paper. Still, what a waist of material for most things aren't worth repairing and you end up just throwing it away and buyinh a new one that will break in a few years.
Communist math.
You have more and you don't even know it until they tell you.
Exactly, in a communist society, the more desperate and poor you make a population, the more you make them "value" and appreciate whatever you leave them.
Give a man a cup of water in the desert and he suddenly feels rich, and he almost forgets that you are the asshole that stranded him in the desert in the first place.
so you're saying the corporatist banksters and the military industrial pharma parasite predators they bankroll are all commies?
In the way that Stalin was a communist, I guess, not in the way that communist citizens were communists.
See communism in my mind is something "you do to people" its like a crime.
So a Communist Leader is really like "count Dracula" while the peasants living in the town that he feeds off of are Citizens of Dracula Town.
We use the word "communist" for both, the Victimizer and Victim, when really we should come up with another name for the perpetrator.
Communism is a system designed to impoverish a population and make them dependent on the victimizer.... much how women who get raped on a long enough time line will actually learn to love their rapist.... this is a similar to the modern day schism in the psyche of the population, the population is so used to being robbed and victimized that they actually rush to the polls and vote for MORE of it.
I could word this better and in a way that is less disgusting and offensive, but meh why beat around the bush?
It's easy to steal from someone, when you have already convinced them that its in their best interest for them to let you.
What do these bankers and economists and leaders do? they "sell" you on the idea that "they need to be in charge", that "Quantative easing" is a necessary evil, that they NEED to steal from you by counterfeiting money because ITS GOOD FOR YOU!.... they are not Stealing from you to enrich themselves. . . . no no they need to steal from you for your own good.... this is the mental sickness that plagues our civilization.
I think you're off base on this. When DVD came out pretty quickly VCR and VHS tapes were way cheaper. When flat screens came out, suddenly CRT TV were selling for 1/3 the price they were a few years before. That is actual price. You can say a flat screen TV isn't worth three times what a cathode ray TV is, but the consumer decided otherwise.
So it's perception or 4D math.
Your perspective will determine the values you use and the answer will be different depending on where you live and/or what you value.
A blind mans 4D price on a TV only goes up.
Right idea, wrong conclusion. Retailers realized that everyone would jump on the new flat-screen bandwagon, and that CRT TV's just weren't going to sell anymore. So, just like fashion retailers, they sell off 'obsolete' or 'last season's' goods to make room for new stuff (and also to get those old things off the balance sheet before they were totally worthless), as well as to get their working capital back so they can buy more of the new inventory.
How do they bake the numbers when the quality of a good decreases?
Due to the fact that the US outsourced its manufacturing base because of "free" trade and financializtion of every aspect of an individual's life, it is just a matter of time before implosion becomes reality. Next year, five years or twenty years in the future, it is inevitable.
Due to the fact that the US outsourced its manufacturing base because of "free" trade and financializtion of every aspect of an individual's life, it is just a matter of time before implosion becomes reality. Next year, five years or twenty years in the future, it is inevitable.
That's easy. They lie.
fun with math!
one of my favorite moments in academics was during a class in environmental economics, a brand new field at the time. my professor was a brilliant math head who chain smoked during class yet climbed mt. washington, the coldest, windyest, highest point in the northeast, every winter. he was at the forefront of the economic studies on the harmful effects of acid rain.
during one class we were playing with modeling the value of intangibles like a view or comparing the value of an uncut forest to a cut forest. we started with the lumber companies' cost structure, a really simple roi model which showed a great real return/acre even over the long cycle. at the time, the real cost per tree was a coupla dollars and the return was several hundred dollars. the professor then modeled the "real" input costs of a tree including water, minerals, oxygen possible negative effects on the environment including the pollution caused by cutting down, transporting and processing the wood. he arrived at a figure well over 100000 dollars/tree. what made it so academically cool was the professor was just having fun with math on the one hand but also warning about the dangers of numbers and ideology.
You might dislike the way they do the calculation, but somehow you have to allow in CPI calculations for the fact that products with a substantial 'technology' component (like the TV manufacturer in the example) regularly up the technology with the price. Since manufacturers invariably give up making the previous generation product when the new one is introduced, it is not possible to produce a _direct_ comparison of the prices of the _same_ product over time. However, I think the TV example does not help the case the article tries to make. One fairly simple way of making an _indirect_ comparison is to find the ratio of the new price to second-hand price of the current model at the present time, and use that ratio to impute a _new_ price (at the present time) of the previous model, using the present time second-hand price of that previous model. The reason I think the TV example does not help the article's case is that I actually did the calculation in the paragraph above, and it showed (as frankly I expected) that the price of the item had fallen sharply.
I think the drop mostly stems from the fact that some people are prepared to buy current item's second-hand, if offered with a decent discount.
However, virtually no-one is prepared to by a second-hand version of an obsolete item - so it's price is close to zero, which means even the imputed new price is still very low.
Watson
When you get cured of cancer you will have to pay a tax on your increased quality of life.
In summary: When one eats an HQA they end up pooping out a CPI.
Then no dessert for you.
Government economists know exactly what they are doing. The government pays billions each year in pensions, and most pensions have annual cost of living adjustments. They don't take their CPI numbers seriously because that is not their job. Their job is to understate CPI and inflation every year so that pension checks can be slowly whittled down through unreasonably low cost of living adjustments. Economists are clearly doing a great job in terms of their actual goal: saving the government money by systematically reducing pensioners to poverty.
What's amazing is how shocked the Dems and MSM are over the election results. ZH'ers know the truth and also know many Rep are no different then Dems but there is no reason to vote a thrid time for the exact same bunch of liers, war mongers and scammers.
Lets give a new bunch of people a chance. They may wake up and see if they keep friggin the American people they will also be dumped out. Maybe some will even be anti-scam ?
Here's one they're missing which should be good for a minus .0225 on the CPI:
I used to buy Levi 501 jeans for $15, then $21, then $29. Now they're $58.00 but on sale ONLY $39.99. BUT, if I buy a pair of Designer Jeans for $250.00 that are already faded and have holes and tears, I am nailing the cost of living by a factor of 6.25. If I pay full price for the Levis, the factor is only 4.31.
Yes, inflation is understated. Hence GDP is overstated, i.e., the economy has in fact been shrinklng since 2008. The recession never ended.