Challenges for the BLS

by Russ Roberts on September 7, 2007

in Standard of Living

In this recent post on how improvements in the iPod make price changes hard to measure accurately, I closed by wondering how the BLS handles such challenges in measuring prices and inflation. In the comments, Spencer writes:

You do not have to wonder.

Give them a call and they will be more then happy to explain their methodology.

When you know how they do it you can come back and explain what is wrong with what they do.

But just writing a post implying they ignore these issues is an extremely biased posting.

You might also check on the weight of iPods in the index. It is
probably something like 0.001% so even completely ignoring the quality
improvement in the iPod would not have a significant impact on the
reported inflation rate.

Actually, I was being rhetorical (or maybe the right phrase is tongue-in-cheek) in wondering about the BLS. I should have posted a link to this post where I cite studies (bottom half of the post thought the first half is another important source of measurement error) of how the BLS tries to measure quality changes and the non-trivial magnitude of the inevitable errors that result.

This isn’t a slap at the BLS. They are diligent and I assume they do the best they can. But in a productive economy like ours, it’s too expensive to measure the impact of quality changes with any precision. They happen too quickly and too often. The important thing is to understand the limitations of our inflation measures and what they imply for the standard of living of the average American over time.

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{ 7 comments }

Don September 7, 2007 at 3:22 pm

Spencer dimisses the iPod as likely only .001% weighted in the calculations. Perhaps you should have mentioned that the iPod is merely indicative, there are thousands, maybe millions, of these little quality improvements happening all the time; so the cumulative impact of getting the hedonic pricing model wrong across many products will have a large impact.

Alex J September 7, 2007 at 4:41 pm

I'd go further than saying that it's 'too expensive' to measure quality accurately. It's impossible. Quality is subjective.

spencer September 7, 2007 at 5:07 pm

You are right . There are studies that show the BLS understates quality improvements. But on the other hand there are also just as good studies that find the BLS overstates the quality improvements.

Thompson September 7, 2007 at 5:07 pm

" The important thing is to understand the limitations of our inflation measures… "

_________

…well, OK– just what are those "limitations", if they are indeed so important ??

Can we accurately measure 'inflation' at all ?

If so, what now is the U.S. inflation rate ?

If not, why quibble about the trivia of a fundamentally erroneous measurement process ?

spencer September 7, 2007 at 5:26 pm

I'm well aware of the Boskin Commision.

The BLS implemented virtually all of the recommendations they made. Consequently the one percentage point overstatement of the CPI they found no longer exist. Moreover, in all the real income data the Census and other report use the CPI-RS — a measure that goes back and applies the Boskin recommendations to the old data and reduces the reported inflation history about one percentage point as the Commission recommended.

I have a major problem with the Bils study on autos. What he says is that after the model change when the BLS makes the quality adjusment that they do not change the data during the year to reflect the changes in autos purchased made during the year that incorporate the new quality improvements. But what his study fails to incorporate into his results is that the BLS catches these changes in the next model year so that the inaccuracy that he finds disappears. But what he does is assume that this inaccuracy during the year is cumulative. but that is wrong. It only happens for a few months and is completely corrected in the next round of adjustments.

kurt September 8, 2007 at 4:53 am

@Thompson
Depends on how you define inflation. If you just want to talk about money or credit inflation, it is easy to measure. If you want to have some norm on price changes, it is not, because no such norm exists.

Steve September 8, 2007 at 11:53 am

Russ,

I loved your previous iPod/BLS post as well as
this
one from Tyler at MR.

This past Monday, I sold a 4GB iPhone on Ebay for a friend who won it in a drawing. A guy in Spain ended up buying it for $585 (with shipping and insurance). You can find the auction
here
(the total price was renegotiated to adjust for overseas shipping and insurance). The auction ended on Monday and my friend nervously asked me whether I had the money after Apple made its announcement. I did.

In light of this experience I had a question for you: There are now several iPhone hacks available for the iPhone which effectively breaks the US/ATT monopoly and allows for some demand to be fulfilled in overseas markets. Am I correct in speculating that the Apple announcement this week should have limited short term affect on the price in overseas markets where supply is very limited? Of course, demand is limited to those willing to apply one of the hacks. If the hack had not been available, the phone would have sold in the $475 range in the US market (the highest bid of a US bidder). I notice that there is a SIM unlocked iPhone listed on Ebay with a Buy It Now price of $859 plus shipping.

Steve

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