CPI hedonic adjustments and substitution

Impact

Measurement of debasement itself becomes a policy variable

What happened

Beginning with the Boskin Commission report in 1996, the U.S. Bureau of Labor Statistics made a series of methodological changes to the Consumer Price Index. 'Hedonic' adjustments attempted to account for quality improvements in products (a faster computer in 2020 is 'worth more' than a slower one in 1990 at the same nominal price), and 'substitution' adjustments accounted for consumers switching away from goods whose prices rose. Critics — most prominently John Williams of ShadowStats — argue that the adjustments cumulatively understate measured inflation by 3 to 5 percentage points per year. The debate matters because Social Security, federal pensions, and index-linked bonds are all tied to the CPI, and a persistently lower measured CPI means persistently lower real benefits.

Context

Hedonic adjustment is philosophically defensible — quality matters, not just nominal price. But the adjustments are almost always applied to goods whose prices are rising (implying the price rise should be discounted) rather than to goods whose prices are falling (which would imply the fall understates the true deflation). That asymmetry is what critics object to.

07 · Stealth Printing

In November 2008, the Federal Reserve launched Quantitative Easing — the purchase of long-dated Treasury and mortgage securities with newly-created reserves. It was, mechanically, money-printing. Politically, it was called 'unconventional monetary policy.' The innovation was not the printing; central banks had been doing that for three centuries. The innovation was that the printing became invisible to most people — the new money entered the financial system through bond purchases rather than fiscal deficits, and its effects showed up in asset prices rather than in consumer goods. Alongside QE, central banks have developed a toolkit of yield-curve control, reverse repo operations, currency swap lines, and measurement adjustments to the inflation indices themselves. The era's thesis: debasement still happens; it's just harder to see.

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