Hedonic Adjustments

[sgeeeee]

A few months ago, Bill Gross wrote a column where he repeatedly referred to the CPI hedonic adjustments as a con job. The column got a lof of attention and was discussed in our forum too.

Curious about how much impact this might have on my retirement, I spent several hours looking into CPI and hedonic adjustments. I am now more confused than ever.

Here are a number of links that seem to contradict each other as well as some links that show information about how a few items were evaluated to arrive at their hedonic adjusted CPI.

Another attack on hedonic adjustments:
http://www.321gold.com/editorials/benson/benson122904.html

Hedonic adjustments are insignificant - Impact is zero:
http://www.seekingalpha.com/2004/10/hedonic_warefar.html

Hedonic adjustments have minor impact:
http://www.bloomberg.com/apps/news?pid=10000039&sid=a7yZyxZ7nrPU&refer=columnist_berry

The CPI Adjustment

In fact, by weight, or importance in the index, just 33 percent of the CPI is subject to hedonic adjustment, not 46 percent, according to BLS officials. Three items, rents, owner's equivalent rent and a portion of the apparel category, account for almost 32 percent of that weighting.

Unfortunately for Gross's argument, hedonic adjustments for those items boost the index. That's because for the rent components, adjustments relate to the aging of the housing stock.

For the other items adjusted hedonically -- computers, televisions, audio equipment, video cameras, VCRs, DVD players, major appliances and college textbooks -- the rate of price increase is lowered. However, those items collectively account for a scant 1.1 percent of the index by weight. Computers and peripheral equipment, about which Gross writes a great deal, have a weight of only 0.23 percent.

If you are really masochistic, you can read the articles below to see how hedonic adjustments are made on specific items.

Article on apparel price index & hedonic adjustments:
http://www.bls.gov/opub/mlr/1994/05/art6abs.htm
This article presents some tables that show the hedonic and nonhedonic figures on men and women's apparel.

Article on Audio products price index & hedonic adjustments:
http://www.bls.gov/cpi/cpiaudio.htm
Includes a couple of tables that compare hedonic and nonhedonic figures on audio equipment.

Article on hedonic adjustments as applied to cordless phones:
http://www.bls.gov/opub/mlr/2004/12/art3exc.htm

Article on the expanding role of hedonic adjustments:
http://www.google.com/url?sa=U&start=10&q=http://www.bea.doc.gov/bea/about/expand3.pdf&e=9901