What Worries me About “Hedonic Quality Adjustments”

An arcane device that impacts so much and papers over the struggles many Americans face in a world that is becoming increasingly unaffordable for them.

This is the transcript from my podcast last Sunday, THE WOLF STREET REPORT:

For anyone alive today, the US dollar has nearly always lost purchasing power with regards to consumer goods and services, such as food, cars, healthcare, or rent. There were a few brief periods when the dollar gained in purchasing power. But those periods are rare. And the Fed despises these situations when workers are able to buy a little more with the fruits of their labor.

In my lifetime, there were only two such periods, from March through October 2009, and a teeny-weeny bit during the oil-bust of 2015, when energy prices collapsed. During my lifetime, the dollar has lost 90% of its purchasing power. That’s the Fed’s plan, as long as it happens within certain limits.

Now, all this is according to official inflation figures, the Consumer Price Index, or CPI, put together by the Bureau of Labor Statistics. The CPI is critical because it is used for inflation-adjustment purposes across the spectrum, such as inflation-indexed Treasury securities, measures of “real” wages, cost-of-living adjustments for Social Security benefits, or measures of “real yields” or “real returns” on investments or “real” GDP.

But when goods and services get more expensive – and that’s what we’re talking about here – there are two factors involved:

One factor is that the dollar loses its purchasing power, meaning it takes more dollars to buy the same thing over time. A cut at a barbershop used to cost me $15 some years ago. Now at one of the few surviving pure barbershops in San Francisco, a cut is $30. This is inflation, a monetary issue, the change in the amount of dollars it takes to buy the same goods or services over time.

The other factor when goods and services get more expensive is that the quality improves. This is not a monetary issue. And there have been big quality improvements in products such as consumer electronics, cars, appliances, housing even.

These quality improvements are figured into CPI via the so-called hedonic quality adjustments. They’re supported by academic research, and they make sense on a conceptual basis. But when the resulting CPI is used to officially portray increases in the actual costs of living, that’s where everything gets screwed up.

In 1990, the base Camry LE with a four-cylinder engine and automatic transmission came with a Manufacturer’s Suggested Retail Price, or MSRP, of around $14,700. The current 2020 base Camry LE with a four-cylinder engine and automatic transmission comes with an MSRP of $25,000. That’s a price increase of 70% from 1990.

But over the same period, the Consumer Price Index for new vehicles – so this is one of the many subcategories of CPI – has risen only 22%. In fact, it rose 22% from 1990 to 1997, and today is flat with where it had been in 1997.

Obviously, no one pays MSRP. Automakers pile on rebates and incentives, and dealers give discounts. But they also did that in 1990. So MSRP serves as a reference point.

In 2018, the base price of the Camry LE jumped by nearly 5% from the prior year. Toyota figured it would get away with it because it had redesigned the 2018 Camry. The appearance changed. It got longer and wider. Aerodynamics improved. It got more horsepower and torque, new standard features, etc. But in the years before the redesign, the base price remained nearly flat.

On a product-by-product basis, many price increases come in bursts, followed by periods of no price increases.

Toyota jacked up the price of the Camry in 1992, 93, and 94 by 6% to 11% each year, until the base price was very close to $20,000. And that’s where it got stuck. Toyota likely saw resistance in the market, and the price kept bumping into the $20,000 ceiling until, in 2006, it finally broke through.

Then from 2006 through the current model year, prices jumped by 25%. Over the same period, the CPI for new vehicles rose about 4%.

In fact, between 1997 and 2008, the CPI for new vehicles fell by 9%. Then starting in 2009, it rose again and today it is back where it had been in 1997. Meaning zero inflation in new vehicles since 1997.

This discrepancy between actual price increases of new vehicles, and a declining or flat CPI for new vehicles is in part the result of the so-called “hedonic quality adjustments.”

The CPI does not attempt to track by how much the costs of living rise. It attempts to show by how the price of the same thing or service changes over time, to measure a monetary phenomenon, the loss of purchasing power of the dollar.

So in 1990, the Camry LE came with a four-speed automatic transmission and maybe one or two airbags. Today’s model comes with an electronically regulated, shiftable eight-speed automatic transmission and ten airbags. And it comes with myriad other improvements and safety features that were unheard of in 1990, like a backup camera so you don’t run over your dog sleeping behind the car.

These improvements come with additional costs, and estimates of these additional costs are removed from the CPI calculations as they occur over the years. These are the “hedonic quality adjustments.”

The theory is that the vast majority of that 70% price increase of a Camry since 1990 is due to quality improvements, with buyers today getting a far superior Camry; and that only a smaller part of that 70% price increase is due to monetary inflation, namely the dollar losing its purchasing power.

But consumers can no longer buy a new 1990 Camry. If they buy a new car, they have to buy these quality improvements. And they have to pay the price for them. The CPI for new vehicles weighs about 3.7% of the overall CPI.

This principle applies to other product categories as well, such as used vehicles. The CPI for used cars and trucks has declined by 11% since 1995, while the actual prices have surged. Used cars and trucks weigh 2.4% in the overall CPI.

The CPI for computers, peripherals, and smart-home devices has plunged by 75% over the 14 years between 2005 and today. Computers and other electronic devices have gotten a lot more powerful, with a lot more memory and storage space, and numerous new features, while prices have declined.

The CPI for telephone services – so this is your cellphone or landline bill – has dropped 11% over the past 20 years. You may well pay more for your cellphone bill than you did in 1999, but you’re getting a lot more too, whether you want it or not. Now you have a supercomputer in your hand with broadband data access to the internet. Telephone services weigh 2.2% in the overall index.

Housing is the biggie. The category shelter includes rents and owner’s equivalent of rent of residence. Shelter weighs one-third of total CPI. Improvements in heating and AC systems, appliances, kitchen and bathroom fixtures and finishes, safety features, alarm systems, smart devices, energy efficiency, etc., are all quality improvements that occur over time, and estimates of those costs are removed from the CPI of housing costs.

In addition, it could very well be that the costs of the quality improvements have been systematically over-estimated, and as these systematically over-estimated costs are then removed from CPI, inflation as measured by CPI would be systematically understated.

So we get this two-fold situation: CPI measures monetary inflation, namely the dollar loses purchasing power.  But the actual costs of living – what people pay on a daily basis to get through life – increase far faster than monetary inflation because people are also paying for the quality improvements, whether they want to or not. And so life gets relentlessly more expensive.

For this reason, CPI should never be considered a measure of cost-of-living increases. But that is precisely how it is being used. And that’s the problem.

For example, the cost-of-living adjustments, or COLAs, for Social Security benefits are based on CPI. But the actual increases in the costs of everyday life due to these quality improvements far outrun monetary inflation. And this has the effect of pauperizing people on Social Security, even those who were OK-ish during the first few years of receiving benefits, but 20 years down the road, their living conditions have become miserable.

Calling these inflation adjustments to Social Security quote-unquote “cost of living adjustments” is an official lie designed to fool people.

CPI is also used to adjust household incomes and wages and GDP and everything else for inflation.

For example, full-time male workers’ wages, when adjusted for inflation via CPI, so their so-called “real wages,” have been flat since the 1970s, according to Census Data. Full-time female workers’ real wages have grown over the period, but from a much lower base. And due to the real-wage growth for female workers, overall real wages have grown a little.

But this overall number hides the fact that men’s real wages are still flat with the 1970s, and that these men are facing a world where the actual costs of living have risen far beyond the pace of CPI, largely due to the hedonic quality adjustments.

These folks are immensely frustrated because they’re living in a world that is becoming increasingly unaffordable for them, while the official CPI data artfully papers over it.

The problems spread to investments. For example, when a stock-market index is adjusted for inflation, it only removes the effects of monetary inflation. Government bond yields and interest on savings products are already largely below the rate of inflation as measured by CPI. Going up the risk curve with corporate bonds, yields exceed monetary inflation. But they may still not keep up with the actual increases in the costs of living.

And that modest nest egg plus Social Security that are supposed to get people through retirement, if any, may turn out to be a lot skimpier 10 years into it than people think, because life has gotten a lot more expensive than CPI indicates.

Conceptually, it makes sense to remove the costs of quality improvements from monetary-inflation indices to track the decline in the purchasing power of the dollar. The result is something like CPI.

But when CPI is stretched to pretend that it portrays the increases in the actual costs of living, it is used in cold blood as a blatant lie.

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  80 comments for “What Worries me About “Hedonic Quality Adjustments”

  1. Ole C G Olesen says:

    Its the same .. all over the socalled ” Developed World ”
    I dont exactely know how it is in the s.c. ” Non-developed ” World

    Probably the same .. just more HONEST for all to see .. with no attempts of disguising the truth ..in the latter ….

    Its a TRICK by Political Elites .in order to renege on empty political promises …hand in hand ( or ruled ) by the Hook nosed Extractors … flaunting their Wealth .. to the awed and dumbed down Masses …

    • char says:

      An increase in gini is worse for workers than unmeasured inflation as most cost are the wages of somebody else.

  2. andy says:

    Well Nasdaq is up over 30% this year alone, easily beating any measure of inflation, hedonic or otherwise.
    Unemployment lower, wages higher, commutes shorter, women better looking, caviar better tasting..

    • Wolf Richter says:

      The Nasdaq being up 30% means: ASSET PRICE INFLATION. And yes, asset price inflation has been much hotter than consumer price inflation since the financial crisis, thanks to the Fed’s shenanigans. But asset price inflation has a tendency to reverse (unlike consumer price inflation).

      • Pedro says:

        Wolf, can you help us understand why the dow went from 1500 to 12,000 from 1985 to 2000? Was that predominately a function of fed printing under Greenspan or actual economic growth driven by exports and productivity gains?

        8x return over 15years would beg the question if we will see an 8x rise from the 2009 bottom of 6500.. Dow 50,000? Especially if the printing this time around was more aggressive.

        From there it would certainly be overvalued and trade sideways for a decade or more as earnings catch up. Much like they did from 2000 to 2016

        • Wolf Richter says:

          Pedro,

          I just want to add a couple of things to the mix here:

          1. You nicely cherry-picked the end points in time of the 15-year span. So I’ll cherry-pick a different set: Sep 1987 to Feb 2003. During these 15 years, the S&P 500 increased by 131%. Not 8x or whatever.

          2. between Sep 1987 and Feb 2013, CPI rose 60%. So nearly half of the increase in the S&P 500 over the period was due to the loss of the purchasing power of the dollar, as measured by CPI.

          BUT: If you had bought 30-year Treasuries at issuance in Sep 1987, they would have earned you 9.8% per year for 30 years. By Feb 2003, you would have made 147% just in interest payments without reinvesting the interest income. If you had reinvested the interest income at prevailing yields, you would have made something like 200% by Feb 2003. And you would have slept well from March 2000 through Feb 2003.

    • Jeff Relf says:

      Andy wrote:
      > women [are] better looking

      Is that why no one’s having sex anymore ?

      When Bernie Sanders redirects trillions of dollars
      away from banks and into the hands of Homer Simpson,
      we’ll enjoy CPI inflation, instead of asset inflation.

  3. andy says:

    Wolf, try Hair Shaper, it’s on Mission and Spear, walking distance. They just raised price for mens haircut to $23.

    • Wolf Richter says:

      I will check them out. My barber is dying (cancer). Great guy, but he’s down to working just a few hours a day. I’ll go to him until he can’t lift his clippers anymore, which may be any day now.

      • andy says:

        Sorry to hear that. Very nice of you to stick with the guy.
        With Hairshaper (inside Rincon center, enter from Mission) you generally dont need an appointment. But if you’d like a very nice haircut ask for Annie, you will need an appointment. She will make you look great and few years younger, just let her decide what to do.
        Apologies for too many comments on same thread.

    • BobT says:

      Here on the west coast of the Gulf of Thailand my son and I both get a haircut for a total of $5 including a 10% tip. Then we go have lunch in a noodle restaurant, $3 total. These prices have been constant for the 10 years we have lived here.

      My son is 11 y.o. and is receiving a far better education than he ever could in a western public school, speaks 4 languages, total cost including uniforms, trips etc about $1,000 per year.

      These low overheads have meant I was able to retire when he was born and share his life and contribute to his development.

      • Mike says:

        Sounds nice. What area are you referring to?

      • NBay says:

        So what sort of net worth allowed/allows you to take advantage of the “low overhead” and retire early in Thailand?
        Phrased another way, should I recommend that a paycheck to paycheck apartment renting couple save up for plane tickets and move there to enjoy your ease of raising children and the other things mentioned?
        “I’m doing just great” anecdotes like this leave a LOT out, I suspect, but maybe I’m wrong.

  4. Anthony Aluknavich says:

    Stil $15 per cut at the most expensive places in south Texas! Boy we are living good, so don’t tell anybody!

    • John Taylor says:

      $18 is normal in Los Angeles…

      • polecat says:

        I cut my own – when I shake my 1/2 inch mane .. and I start to get that Breck kind of feeling, I know it’s time for another buzz job ! No headonics needed.
        ‘;]

        • NBay says:

          There you go. My dad bought a haircut kit and did us from early grammar school on, He screwed up first few flat tops, resulting in a buzz cut, which I still do for myself…(except for hippie days) don’t even need a mirror, do it outside by feel..I run a 3/8 starter mane. That with wearing jeans and t-shirts all my life is probably why I never got rich. Didn’t dress for success.

  5. Dog Walker says:

    “The other factor when goods and services get more expensive is that the quality improves.”

    I don’t see adding a whole bunch of bells and whistles on a new car as’ improvements’ and it certainly does not mean quality has improved. My guess is we have different definitions of the word ‘quality’. I concede you are an expert on cars but you are also very well off by my standards and don’t see what the plebes see.

    More bells and whistles mean the car will need more, complex repairs. Try to sell the car with one of those new features out of whack, such as
    a broken backup screen or camera.

    You also assume those improvements don’t subtract from the quality elsewhere. (they always do).

    Toyota, until only a few years ago offered lifetime warranties on new installed emission components such as mufflers. They no longer do. Not to mention that Toyota’s supply chain for parts has been globalized. Old toyota parts had the part number stamped on them, now its just a label, as I assume there are multiple parts suppliers instead of just one, such as Denzo. I believe the quality on their parts has declined.

    Older laptops or phones were made of heavier plastics and had more life in them for certain. Now integrated non-repairable batteries are common-place on laptops and phones (Apple pioneered this trend). Have you shopped for shoes lately? Most shoes produced today are cheap garbage, regardless of what you are willing to pay.

    It’s a basic principle of economics that when the ‘means of production’ is commoditized, and globalized this creates lower profit margins. As manufacturers cut costs due to increased competition, quality suffers, and it has.

    Most products made today are pale shadows of the same product from the 1990s. MANUFACTURERS ARE COMPETING ON PRICE,NOT QUALITY. Particularly since most global manufacturers are subsidized by cheap debt. In the past many manufacturers would have gone out of business already .
    The lifetime of everything from refrigerators to washing machines and just about everything else is much less.

    Those improvements you cited in housing are virtually non-existent for the vast majority of Americans. Most new California condos and apartments have paper thin walls and ceilings (I’ve lived in many of them – the actual ceilings flex as people walk over them). Sleep seems to be a luxury only the rich can afford.

    Those hedonic quality improvements are offensive they are so wrong. People are paying more and getting less!

    • Dale says:

      To add to your list:
      My wife back in the day loved Ethan Allen furniture. She bought a sofa that cost nearly $5K 30 years ago. It is still solid as a rock. No reason it can’t go for another 50 years.

      10 years ago we had occasion to buy more furniture. We went to Ethan Allen. Everything was much less expensive. And of far shoddier quality. What we did buy we sorely regret now.

    • Lisa_Hooker says:

      “The quality will remain when the price is forgotten.” – Henry Royce

      Unfortunately for most consumer goods these days the crap quality cannot be forgotten no matter how hard you try.

  6. Plumasone says:

    Hedonistic adjustments are the gift that keeps on giving for the
    elites and business owners. A low level of “reported inflation”
    justifies capping employee wage increases leaving more room
    to raise salaries & benefits for top management. Banks can
    justify paying next to nothing on C.D.’s Retirees get shafted
    too. Social Security paid NO COST OF LIVING increase in
    January 2010, January 2011 and January 2016. Bah humbug.

  7. Consumer inflation assumes that wages have some effect. What is more important is the government safety net. A little bit of discretionary income can be inflated if essential costs; housing, healthcare and energy are subsidized. CPI is more constant than EFFR, regardless of which party controls government. Now they want to rollback SNAP. Reagan used to rail about “welfare queens in Cadillacs” but entitlements have been growing (at around 2%?). They have done a great job, I just don’t know what happens when lose control.

    • wkevinw says:

      Here is a good link:
      http://blog.yardeni.com/2019/05/income-stagnation-is-progressive-myth.html

      There are lots of “suggestions for recalculation” for inflation, etc., the most interesting of which are government aid, and using a different measure/deflator.

      On the subject of government aid, I think the author would agree that it leaves out a significant part of the economic productivity: the product one gets paid for vs. not having work and getting paid (Not placing blame on those who want jobs and don’t find one.)

      I don’t agree with all of it, but it’s worth a read.

      • I was making $10/hr in 92. The same types of jobs now might pay $15 to $18, but certainly nothing even vaguely like 160%. I’d say a 50% gain aligns better with the tent cities I see which, incidentally, are full of people not calculated in anyone’s “average income” numbers. What’s the source for this massive gain you heard about? I’ll give it a shot, but my eyes say otherwise.

  8. Leonardo says:

    Stock.market has outpaced inflation so that is where you need to invest

  9. Gold is just..gold says:

    $30 for a haircut! For years I paid $8 at a basic ‘Men’s Haircut’ chain that employed mostly non-English speaking illegals some of whom were as likely to take off a bit of ear as hair – but that’s OK, as a former Boy Scout I always carry a couple of 1st aid plasters in my wallet.

    When the price went up to a massive $10 my hair was thinning anyway so I zapped the lot and went full baldy as a personal protest against rampant inflation/price gouging. My actions were dramatically effective as the chain went bust not long after and good riddance! Naturally, I put all the money I saved into PM’s and doing quite well thank you very much.

    • andy says:

      Bold and ear-cropped. Winning!

    • Wolf Richter says:

      Gold is just..gold,

      Your word “plasters” – is that Strine for the Yankee “Band-Aid?”

      • Gold is just..gold says:

        My dear Mum, in Nottingham in distant century, when I fell/was viciously kicked by my brother , would cry, “Gold has cut his leg, get the plasters” (then she got them herself – we were a small family).

        I just checked the box and…Horror! It says “Band Aid”. We are subverted, Yankified , all hope is lost, the end is truly nigh.

        • Dale says:

          A word to the wise: surgical tape. Any nick or wound will heal in half the time, and it costs 1/10 as much.

        • NBay says:

          For years all us build/fix/fabricate types ran a few “H” bandages from surgical/medical supply stores in our wallets. Fabric and strong adhesive. For simple clean finger cuts, electrical tape works great, keeps you working at W-2 or home, heals as good as stitches.
          Once had a boss that called splinters, “5 o’clock wood”, get them with your teeth or forget it.

  10. KY says:

    I’m playing devil’s advocate here but one solution to this hedonic adjustment conundrum is people should just go back to buying the lower quality things equivalent to 30 years ago.

    For example, Wolf said consumers can no longer buy a new 1990 Camry with MSRP $14,700, but today 2019 Hyundai Accent MSRP is $14,995, about the same cost, and better yet, 2019 Accent probably has nicer features overall.
    For cellphones, you could get one of those prepaid flip phones for maybe $20. Nobody mandates you to buy a new iPhone.

    “Just live the same quality of life you lived 30 years ago. Don’t expect any quality improvement if you are not rich.”
    That’s the message I’m getting from the use of CPI to adjust everything to “real” terms (real GDP, COLA, real wage growth, etc.).

    Of course the problem with this is you feel the pain of comparative poverty. People around you will be enjoying nice, fancy new things and you’ll be stuck with very minimal, basic things.
    Nobody will want to date you or socialize with you when you are so poor, at least that’s how you’d feel.

    This may sound like one of those First World problems which may seem petty compared to some life-or-death problems at developing countries, but nonetheless, this problem is very real for people living through it.

    When everyone had the similar quality of life 30 years ago (no internet, no smartphones, very basic cars), people were just fine. When you are left behind from everyone else, it’s not fine anymore. That’s just the human nature.

    • Wolf Richter says:

      And at some point, after stepping down and steeping down the model ladder, you’re going to run out of rungs in form of a $14,700 car — maybe next year, or maybe year after next when the cheapest new car out there may be $15,700. And then you’re stepping down to good used. And then after a few more years of this, you’re slowly stepping down to clunkers.

    • Lisa_Hooker says:

      I have always liked to eat fish. I simply refuse to adjust by eating cat food. Even higher quality cat food.

    • Governor Moonbeam says:

      Typical boomer response. Woefully out of touch with reality, yet so willing to hector us with useless advice

      • NBay says:

        “Pain of Comparative Poverty” ????

        Diagnosis -PCP Prognosis -not usually good

        Hopefully modern medicine is now working on a drug to relieve it.

        Because self medication with opiates, meth, alcohol, etc, can land one in jail with resulting fines, legal fees, etc, making PCP even worse. (although that “industry” does employ many…the bright side)

        OK Boomer.

  11. unit472 says:

    I noted in Kuppy’s earlier post that most of my ‘cost of living’ is paying for services not goods. There is little scope for productivity or quality gains in insurance though improvements ‘hedonic’ or otherwise in autos though I am not optimistic the ‘savings’ will be passed down to the consumer. Thus I don’t mind paying more for a new “Camry” with blind spot warnings or auto braking if it reduces auto accidents. Same with more efficient appliances and HVAC units since here the savings in energy consumption do get passed down in the form of lower utility bills. Even housing can improve if your time line is long enough. More fire and wind resistant construction and materials will lower insurance costs ( hopefully ) so there is a benefit.

    The other biggie, healthcare, seems more impervious to productivity or quality gains barring a breakthrough in technology. Were we , e.g., able to use pig organs for human transplants dialysis for hundreds of thousands of Americans could cease. Still people get old and will die of something and extending the ‘average’ human lifespan only increases costs for healthcare and pensions unless the gain in lifespan also increases the number or years a human can also work.

    • Harrold says:

      The lifespans of those efficient appliances have gotten rather short.

      • char says:

        Those appliances are much cheaper and are the lifespans really shorter or is it that the only lifespan of long-lived appliances are remembered/ IMHO there is a big selection effect going on with the good old days.

        • Dale says:

          In my first house, we inherited a clothes dryer that was already 40 years old. It kept working until we sold 10 years later.

          On the other hand, it required constant maintenance. No $ involved, just labor. A headache just the same. But my current dryer is highly unlikely to survive past 10 years.

        • char says:

          a 40 year old dryer is likely to survive 25% more time. But were all dryers made this sturdy or is it a selection effect of being so old. An expensive to repair dryer would have been ditched years ago.

  12. R2D2 says:

    The everyman US Camry has increased on average in total price by +70% between 1990 and 2020.

    US average net wages per-head have increased in total by +160% between 1990 and 2020.

    US consumers are in pretty good shape!

    • Max Power says:

      Median household income has risen about 215% during this time span.

      The current Camry has more conveniences, is significantly larger and more powerful, is more fuel efficient and lasts longer than the 1990 model.

      Yeah, I’d say it sounds like we’re really not doing quite as bad over this time period as some make it sound like… at least in as far as the two above measures are concerned.

      The big price increases have been in other things… healthcare, higher education, childcare, home prices, etc.

    • Wolf Richter says:

      Two things:

      1. Median wages: I cannot find your number. What I find is that nominal wages increased about 120% over the period.

      2. You just committed the typical fallacy of lumping the income gains of the top 20% and particularly the top 5%, which are huge, into the same bucket with the bottom 80% and the bottom 60% (this is what median and average data is doing). But the top 20% are not the primary customers of the Camry. The Camry costs less than the median price of a new vehicle. It’s a middle-class car, not upper middle class or elite. So check out how the middle class (between 20% and 80%) has been doing in terms of household incomes over the decades, compared to the top 20% and the top 5%:

    • Dale says:

      Real wages for 70% of employed Americans, those classified as production / nonsupervisory, have increased 15% in 55 years.

      Meanwhile, the cost of living (real per capita PCE) has increased almost 200%.

      Statistics courtesy of the BEA and BLS.

      Some are doing quite well, myself included. But the vast majority are being crushed. So don’t be surprised when the candidate of your choice is squashed in an election.

  13. nofreelunch says:

    Great article. Just goes to show when you show up to claim your promised fair share from the government in the form of Social Security, you won’t get your fair share. At least with my 401k, I have a chance of beating real inflation. Let’s add more pain to this. The SS COLA adjustment was 2% last year, but Medicare B premiums went up 6% for last year (that has to be real money now because the government has to pay it in real money). Medicare B premiums are automatically subtracted from SS checks. So if COLA remains a lie, and Medicare B premiums increases are real, how long before the average SS check is zero? 30 years. Now, let’s throw in the tax on SS, whose threshold on other income (think IRA withdrawals) is never indexed to inflation. So people will be paying tax on SS benefits that will be negated by Medicare B premiums. In other words, tax on phantom SS benefit payments.

    • Max Power says:

      Yeah, the fact that the threshold of SS benefits which is subject to IRS tax has never been adjusted for inflation is unconscionable!

      It’s kind of like the state income tax brackets in Virginia. They were set back in 1973 and never adjusted for inflation. As such the highest bracket kicks in $17K, a princely sum back in those days (equivalent to about $100K today!). Now all you have to do is earn just a bit over the minimum wage for every extra dollar to be taxed at the highest rate.

      Sometime it works the other way though… one of the reasons roads in some parts of the US are relatively poorly maintained and not much improved is that the gas tax hasn’t been indexed to inflation in over 30 years.

      With respect to Medicare part B premiums… I believe that if you have them coming out directly out of your SS check then the increase is capped at the COLA rate. Of course that doesn’t help new retirees though.

  14. InflationNation says:

    Not only has the dollar lost it’s pricing power, the younger generation has lost it’s purchasing power as they simply do not have the income flows to buy us older people’s assets, assets in which we can not easily afford ourselves, and less affordable each and every year into the future. For example, the median homeowner age in 1981 was 31 years old. Today, it is 47 years old. Young people have been priced out of housing, as asset inflation has mostly benefited those much older. I feel bad for the younger generation, as they have been priced out of a basic necessity to survive. The younger generation is going to be chained to the hedonic treadmill adjusted CPI scheme for their entire lives as they become college debt slaves, wage slaves, heathcare slaves, mortgage slaves, etc…

    https://ei.marketwatch.com/Multimedia/2019/12/04/Photos/NS/MW-HW365_homebu_20191204163701_NS.png?uuid=3528e072-16de-11ea-a68e-9c8e992d421e

    • Wisdom Seeker says:

      Non-Sequitur Alert!

      “For example, the median homeowner age in 1981 was 31 years old. Today, it is 47 years old.” – that might be true, but it does NOT imply this:
      “Young people have been priced out of housing”

      All it tells you is that the population has aged. If the median US citizen was 31 in 1981 and 47 today, of course the homeowners would be the same age!! Could also be maybe that older people are doing better at living in their homes instead of going to live with their kids. (Statistics I found show median age HAS increased since 1980, from 30 to 39 years. Toss in longer time spent getting education before earning one’s own income, and the median age for buying a home would also be later still!)

      The data you want to back up “young people cannot afford homes” would be data on median years-since-last-educational-degree of First-Time buyers, not the age of all current owners.

  15. Old-school says:

    I like haircuts as a measure of currency debasement. The service I get today at $14.00 is the same as I got 55 years ago when I was 7 and a haircut was $1.25.

    • char says:

      Problem with haircuts is that wages are the main cost and as such measures mostly the local cost of living and the local employment opportunity, not more national increases is cost.

      • sharon buruch says:

        Well the rent for the barber shop was $50/montn in the 1970’s and now its $2,000

        The insurance costs too, were zilch in 1970’s, nobody bothered, today you need a million usd policy, that costs $500/month

        Thus you see the typica $50 haircut

        I don’t think wage up much, but pro’s need to cut more hair per day to pay the bills, and owners who work alone in a single shop, are just old guys? right?

      • Mars says:

        Buzz #2 haircuts on Main St are $15 in the 4 chair shop, only 2 older barbers and they often have a waiting line. They don’t take CC/debit cards. My last haircut took 10 minutes. I’ve never seen anyone pay just $15, usually a Jackson.

        Sometimes, my GF cuts my hair with the clippers I bought and the price is more than $15…

    • sierra7 says:

      Old School:
      “Shave and a Haircut; Two-Bits”!!!!
      (I remember when!!!!)
      Haircut in my day for kids was “two-bits”; adults, “four bits”!
      (SF outer Mission)

  16. InflationNation says:

    Can anyone explain the hedonic adjustment for healthcare? Is it simply death? How is healthcare, at $11,172 per person per year in America, not the number one issue for both rich and poor alike? How can this not be a partisan issue, of course not including Wall Street’s opinions. Unlike car insurance, we can not simply “turn it off” and stop driving, or “replace” our healthcare with another option, besides the option of death? Yet what a great way to keep people chained to their corporate jobs, chained to a government program, deserate to stay insured and healthy. Quit your job and your family goes without healthcare. Vote the wrong people into office and your family goes without healthcare. And once you start a new job, companies often require 30 to 90 days of employment before you can qualify for their healthcare plan. Capitalism driven healthcare is a cruel beast, to say the least!

    Per thehill:

    The study from the nonpartisan actuaries at the Centers for Medicare and Medicaid Services (CMS) found $1.2 trillion, or 33 percent of health care spending in 2018, was on hospitals. Total health spending reached $3.6 trillion.

    According to the study, health spending overall climbed 4.6 percent in 2018 to $3.6 trillion, accounting for nearly 18 percent of the U.S. economy. Health care expenditures amounted to $11,172 per person

    • Lisa_Hooker says:

      There is a much simpler solution. Watch Edward G. Robinson near the very end of the film Soylent Green.

  17. char says:

    Not this again.

    Car manufacturers move their type names upmarket so you can’t say the Camry has increased 70% in price because it is a different, more upmarket product. It is like comparing the newest Golf with the Golf mk1 while the Up! has more parts in common with the Golf mk1. It is also of the same size while the newest Golf is much bigger.

    ps this has nothing to do with hedonistic price inflation correction. The car makers did it even when there was no quality improvement

    • char says:

      2006 was a change in model. That explains to price rise.

    • Wolf Richter says:

      Char,
      What you don’t get because you don’t want to get it is that as you step down the ladder from the Camry to the next lower model, and so on, at some point, you run out of models. And then you’re DONE with new cars. Then it’s good used cars. And a few years later, you’re DONE with good used cars, and it’s clunkers. This is how life becomes unaffordable.

      A Camry’s price is below the median for new cars. This is a middle-class car, always has been, nothing has changed. But a lot of people that used to be middle class can no longer afford it.

      This is also an ECONOMIC problem because now car sales (deliveries) are back where they’d been in 1999 though the US population of drivers has surged since then.

      • char says:

        It is not a step down. Car makers have different platforms which they slowly upgrade. But the name those platforms carry don’t stay constant. The model names go every ten years or so one platform up.

        ps. In packed goods something similar happens except their they slowly remove content. But if Mars sells a family pack of mars for $2 in 1993 and now but the content went from 23 to 19 you wouldn’t say inflation was zero.

        • Wolf Richter says:

          Char,

          You still refuse to get it. So you go from a Camry to a Corolla and then to a Yaris… and then what???? USED CARS because the Yaris is the cheapest thing Toyota makes, and you cannot go lower. But you can still buy a good used car for the former price of a new Yaris. And a few years later, you cannot buy a good used car anymore for that price, and you’ll be buying a clunker. It IS a step down each time, and you end up with a clunker.

        • char says:

          I know European market cars better than American. So i will use Volkswagen.

          First you bought the smallest VW. It was called Golf. Ten years later you bought the smallest VW. It was called Polo. And ten years after that you bought the smallest VW and it was called Up!. All those cars had the same wheelbase and shared more components than the old Golf did with the newest Golf. Is the Up! more expensive that the Golf 20 years ago. Yes and that is the inflation you should look at. Not the price increase because type-names go up in size-class.

      • WSKJ says:

        re autos, new and used, from the year I lived in Europe, c. 1972:

        “Je t’achèterai un Deux Chevaux” – French pop song of that time.

        and:

        “Mein auto ist scheisse”, remark of a German guest-worker, the same time frame.

        and, yes, auto-correct is perfecting? my quotes above- a hedonic adjustment which I get whether I want it or not……..

  18. Dale C says:

    The quality of food sold in the main supermarket chains here in DC has been going downhill for the last 20 years. Its getting more expensive and unhealthy. Most of the isles sell junk food. When you add the declining quality with the higher prices and poorer service you get a real picture of the decline in the purchasing power of the dollar.

  19. Cobalt Programmer says:

    (may be i am an outsider)

    I understand like this. Every money printed new is spent for improving the quality of life of every citizen. Hence, the new money printed, will not result in inflation. Rather, attributes are improved. Feds come up with a suggestion that, we reduce the rates so that the money will be invested wisely in research and development of your car (and the smartphones) which will increase the quality and finally everything is a zero sum game. In reality, every money printed (or the lending rates or whatsoever) will go to the rich. Research and development or science will be only <5%. This will lead to poor quality of life in the end.
    Also, I realized that I read the articles in your own voice, if I hear the podcast before. If I don't hear your podcast, I read it in my own voice.
    Another thing, you look like William Dafoe who investigates Wall Street bad guys like Christian Bale.

  20. char says:

    There were a few brief periods when the dollar gained in purchasing power. But those periods are rare. And the Fed despises these situations when workers are able to buy a little more with the fruits of their labor.”

    Not only the fed, also workers that lost there jobs, bonuses or overtime.

    ps The oilprice collapse in 2015 was not hated by the fed but was also a one time thing

  21. freewary says:

    How many dollars exist yesterday, today & tomorrow is much more important than the prices of things and wages. Who gets first access to newly created dollars is also very important.

  22. Most people who look at the CPI know it for the lie it is. The minute SS and taxes were pegged to “inflation” it became the lie. The government realized they had to hide the numbers to keep from doling out more and more money to people.

    But the more insidious CPI tactic is called “substitution”. To present a fraud of low inflation, if steak were too expensive, the government can easily just say “Well, hamburger meat is beef. So, people are still doing pretty good eating that instead of steak.” Problem solved!

    When I first heard of this, I thought “My God. What if we are finally brought down to eating shoe leather and dirt? What the HELL is the substitution for those???”

    Government Statistics are not in YOUR best interest. They are only in the GOVERNMENT’S best interest. Subject be damned.

  23. *substitution. Not substation.

  24. raxadian says:

    Yo quote someone “The living will envy the death.”

    It has actually happened, in fact it is actually happening. Gen Zs envy the Gen Xs and Gen Xs envy the previous generation “Happy days”.

    We may live longer but we do it in a crappier way.

    All those movies about bad futures were a warning not a how to guide.

  25. BC Puckett says:

    Here’s a thought. Let’s apply hedonic adjustments to wages too.

  26. VamosAzul says:

    And just six months ago the BEA put out this exercise in absurdity…

    Are Medical Care Prices Still Declining? A Systematic Examination of Quality-Adjusted Price Index Alternatives for Medical Care | U.S. Bureau of Economic Analysis (BEA)

    https://www.bea.gov/research/papers/2019/are-medical-care-prices-still-declining-systematic-examination-quality

  27. Crush the Peasants says:

    Your haircut got to be twice as good?

  28. Michael Oojai says:

    Found this on a different page; seemed relevant to this discussion

    https://consciousnessofsheep.co.uk/files/2019/10/price-changes-in-usa-in-past-20-years-947e-768×715.jpg

  29. riverwind says:

    I cut my own and my kids’ hair, with quality (skills) improving overtime

  30. riverwind says:

    BTW, this is a very educational piece, I never knew about this Hedonic Quality Adjustment, and what you are arguing makes total sense. Thank you!
    Cars going to all electric sounds like another systematic quality improvement initiative.

Comments are closed.