“Hedonic Quality Adjustments” for New and Used Vehicles, Consumer Electronics, Many other Products in the CPI

Hedonic quality adjustments are made to the CPIs of many goods and services but have a particularly big impact on those that evolve the most with technologies.

By Wolf Richter for WOLF STREET.

“Hedonic quality adjustments” play a big role in the difference between actual price increases of new and used vehicles and the increases in the Consumer Price Index for new and used vehicles. For many years up to the pandemic, the CPI for new vehicles remained roughly flat while prices of new and used vehicles surged.

The Bureau of Labor Statistics, which produces the CPI, started applying hedonic quality adjustments in the late 1990s, not just to new and used vehicles, but also to consumer electronics, appliances, and other manufactured consumer products, such as some clothing, plus some services, such as housing and internet access (which went from dialup to 10 gigabit broadband in 25 years).

Hedonic quality adjustments are not applied to food and certain other products and services ( the BLS list of product categories is here).

The logic is that these products have gotten a lot better over those years. For example, the Ford F-150 pickup truck went from a three-speed automatic transmission decades ago to a standard 10-speed computer-controlled transmission. The improvements in the transmission have been dramatic over these decades. But there are also costs associated with going from a basic three-speed to a computer-controlled 10-speed transmission, and the hedonic quality adjustments remove the costs of these quality improvements from the CPI.

Price increases that consumers have to deal with consist of many factors, including:

  • Loss of the purchasing power of the dollar
  • The costs of quality improvements, for example going from a 3-speed automatic transmission to a 10-speed electronically controlled transmission, or going from a 1995 Motorola cellphone to a current-model iPhone.
  • Profit margins of the producer
  • Input costs, labor costs, etc.

But only the loss of purchasing power of the dollar (inflation, a monetary phenomenon) is what the Consumer Price Index attempts to show: how many dollars it takes to buy the same product over time. And if the product is improved in a significant way, it’s no longer the same product.

A new F-150 today is a different product than a new 1985 F-150 was back then. A Motorola cellphone from 1995 is not the same product as the current iPhone. Dialup internet access in 1995 is not the same service as 10-gigabit broadband today.

To isolate the loss of purchasing power of the dollar from the costs of quality improvements, the BLS removes the estimated costs of those quality improvements and calls that removal process “hedonic quality adjustments.”

This process has suppressed the CPI for new vehicles over the past 25 years, even as actual prices in dollars of new vehicles have soared.

This process also caused the CPI for consumer electronics, such as computers, to decline nearly every year. The decline is further accelerated by the fact that prices of many consumer electronics actually declined over time, such as big-screen TVs and laptops, even as the performance and other quality measures improved.

Conceptually, it makes sense to remove the costs of quality improvements from CPI, as it tracks the monetary phenomenon of inflation — how many dollars does it take to buy the same product over time.

But consumers face the problem that they can no longer buy a new F-150 with a three-speed automatic today that would be cheaper than the 10-speed version. Consumers have to pay for the costs of the quality improvements, whether they want to or not, even though those costs have been removed from the CPI that tracks the purchasing power of the dollar.