Hedonics and Inflation

July 8th, 2008 | inflation -

One of the problems with measuring inflation is that the quality of the product changes over time.

Some products become much better, with more features and more userability. For example, the features on a mobile phone have increased dramatically in the past 10 years. If we buy more expensive models of mobile phones, can we really say that is inflation? We are buying better quality products and so in a way the price is going down, because we are getting more for our money.

For example, the number of features on a top of the range vodaphone phone increases 50%, and the price is 5% higher. Is that inflation of 5% or deflation of 45% ?

Hedonics is the ’science of trying to work out how much product quality has changed and adjusting prices accordingly. It is used in the US calculation of inflation, I’m not sure about the UK.