Hedonics is the science of trying to work out how much product quality has changed and adjusting inflation to take account of the fact more expensive products are not just inflation, but also improved quality. It is used in the US and UK calculation of inflation.
If a TV increases in price by 10%, and the TV was exactly the same, that would mean it reflects inflation of 10%.
However, if the quality of the TV has changed, and you are paying 10% more price for a 20% bigger TV, then it is more complicated- the higher price reflects a combination of higher prices and higher quality.
It becomes difficult to work out – how much of price rise is due to inflationary pressures and how much is due to the changing nature of the product.
Example of a more expensive tv
- 10 years ago, a standard 24″ CRT tv may cost $200
- Now, that 24″ tv is no longer available. The consumer cannot buy.
- A popular model, readily available is maybe a 40″ plasma tv with built-in recorder. But, that costs $1,000.
- On first glance the price of tv’s on the market has increased by 400%.
- But, officials will not count the increase in price as 400% because it is effectively a different product. They will make an estimate of what percentage the price increase is due to better quality and what percentage is actually higher prices.
Another example, if the price of a banana increases 10%, this is more straightforward for calculating inflation, a banana is pretty much the same as it was last year. No adjustments have to be made.
Controversy over using Hedonic adjustments
If we adjust inflation downward because of the improvement in the quality of the goods, some argue this can lead to an under-estimation of inflation.
For example, a mobile phone may be a necessity for modern life. People might like to buy a simple model for £50, but mobile phone companies no longer supply these cheap models, therefore, consumers are forced to buy the higher-priced models – even if they don’t use all the features of a smartphone.
For example, if you are an Apple consumer and you keep a mobile phone contract with an Apple phone, the price of your monthly charge has been rising faster than inflation.
True, you are getting more features and a better phone. But, you may feel this reflects an increase in the cost of living because these new features are not much use to you and there is no option to buy a cheaper Apple phone.
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 by 50%, and the price is 5% higher. Is that inflation of 5% or deflation of 45%?
Quality of clothes
Another example could be the quality of materials used in making clothes. For example, if a t-shirt was $10, but made out of heavy fibres, it might not be so desirable. If a new t-shit cost $15, but was made out of stretchy and comfortable materials. Consumers may view this as a different and improved product rather than inflation.
Hedonics is based on the Greek word for ‘pleasure’. The idea is that officials will measure how much happiness you get from products. If you are getting more utility/pleasure from new version of mobile phone, then we can adjust the price rise as quality improvements.
If a more expensive couch gives the same utility as a cheaper version, then this price rise will be noted as inflation and not an improvement in quality
Examples of items used in US CPI hedonic adjustments
Not all categories of goods have hedonic adjustment. But, these categories are measured for quality improvements
- Men’s Shirts and Sweaters
- Men’s Pants and Shorts
- Women’s Dresses
- Women’s Footwear
- Major Appliances
- Photographic Equipment and Supplies
- Rent of Primary Residence
- Owners’ Equivalent Rent of Primary Residence
- Land-line Telephone Services
- Internet Services
- Cable and Satellite Television Services