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How Governments Cook The Books

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http://www.mises.org/story/1873

The term “hedonics” is derived from ancient Greek and basically means “pleasure doctrine”. It is also the doctrine which the Bureau of Labor Statistics (BLS) applies when calculating the price indices and for the computation of the real gross domestic product and of productivity. The idea behind hedonic price index calculation is to incorporate quality changes into prices. This way, a product may be on the market at a higher price, but when the product qualities have augmented more than the price in the eyes of the BLS, it will calculate that the price of this product has actually fallen.

Applying the hedonic technique to a host of goods and services means that even when prices were generally rising, but product improvement are deemed to be larger than the price increases, the calculated inflation rate will fall. With a lower inflation rate, the transformation of nominal gross domestic product (GDP) into real GDP will render a higher result. Likewise, given a constant labor input, productivity will increase. Hedonics opens the door to producing magical results: a lower inflation rate with generally rising prices, a higher growth rate although the economy may be weaker, and a higher productivity number, although productivity would have been declining without the hedonic imputations.

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For economic and monetary policy formulation, the price index represents a central indicator. It affects directly social security payments and translates indirectly into the determination of the figures for real economic growth and productivity. The so-called “inflation rate” is central to the conduct of monetary policy, and for investors it serves to determine the real yields of bonds and stocks. However, what is published as the number for inflation is a highly crude number at best and a very deceiving one at worst. When taken naively at its face value, the inflation rate as it gets published not only distorts policy decisions, but also those of the private investor.

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inflation is a measure of how much free money a government is printing for itself.

japan aren't printing much at this time. hence low inflation, low interest rates.

of course, there are always fluctuations because of oil etc.

inflation is a stealth tax, when are people going to wake up to it.

inflation is man made. It does not have to happen.

http://www.abelard.org/inflation.htm

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"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

- John Maynard Keynes, 1920

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Hedonic adjustment must be a real art form... and a real con.

Think about it: a dab radio may cost more than last year's analogue job, but hedonically the difference isn't that great because of the added utility. What's that? You still want the analogue one? Hard luck mate we're turning off the signal in a couple of years!

The question of course is whether hedonic adjustment is relevant when you can no longer use the old product. My feeling is, if you are forced to buy the more expensive alternative, hedonics are irrelevant: the cost of living has gone up , period.

Now try getting a banger through an MOT or running broadband with a 386, or submitting that thesis written with a pen rather than on a laptop. All unaviodable costs. All additions to the cost of living. All inflation.

Of course there is one area where hedonics dare not speak its name: house prices. Forget the extensions, the GCH, the en suites etc. It may not even resemble the house you bought 20 years agao, but that price uplift is all good solid investment gain. :lol:

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their job is simple.

keep wage increases as low as possible.

e.g.

dear uk, inflation is 2%, we've done a wonderfull job keeping it so low.

meanwhile we print off 7% new free money for government without you even knowing.

then they say wage inflation is very high at 4%.

employees say "look at what a good deal we are getting, inflation is 2%, yet we got a 4% pay rise, haven't we done so well".

the con.... employees think they are getting a 2% pay rise, when in fact they are getting a 3% pay cut.

meanwhile house prices rise at 20% per year and it's not even included in the figures, go figure (sorry for americanism).

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Er....this is rather heady economics for me, but can I ask a few simple questions:

1. Is the fact that house price inflation is never included in government inflation figures part of the "hedonic" conspiracy?

2. Why is it not a national scandal that the entire media and establishment seems to accept house price inflation not being included in so-called inflation announcements?

3. What would the inflation figure be for say, May 2004, if house inflation was included?

4. Why does no economist (apparently) EVER complain that house price inflation is never included in inflation figures?

5. Is it that NOT including house inflation in "inflation" figures is so obvious, so blindingly clear, that everyone thinks they would be thought of as stupid if they mentioned it?

I think I got my point across, but I am not sure. Forgive me if I am naive and stupid. Are there any other naive and stupid people here who wonder the same thing?

VP

Edited by VacantPossession

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Let's just make this clear VP: if I'm right you are suggesting house prices ought to be included in the inflation figure. No?

:P

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4. Why does no economist (apparently) EVER complain that house price inflation is never included in inflation figures?

The problem with including house prices is that they represent both a consumer good (housing) and an investment asset. Think about it; it would be pretty silly for the BOE to include the prices of the FTSE-100 or a basket of Eurobonds in the inflation measure, as the inflation index is intended to represent the average cost of living for the average person.

5. Is it that NOT including house inflation in "inflation" figures is so obvious, so blindingly clear, that everyone thinks they would be thought of as stupid if they mentioned it?

What economists really want to know is what the price of consumption of housing is doing, not housing the asset. So what they need is a measure of housing costs without any investment aspect: rents.

There is a very strong case for including rents in an inflation measure, and indeed the US inflation measure includes actual and imputed rents (ie what owner-occupiers are saving themselves in rent by owning):

http://www.bls.gov/cpi/cpifaq.htm#Question_3

HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)

However, there are some indications that the BOE and other central banks are considering including house prices in the inflation measure:

http://www.thefrygroup.co.uk/news/viewrelease.asp?newsid=30

http://macroblog.typepad.com/macroblog/200...sing_house.html

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Agree, house prices should not be in inflation. Imputed rents - yes. Problem with house prices is that the expenditure is either rent or mortgage & repairs, and the mortgage of an average household is such a lagging indicator that it is useless (e.g., someone who took out a mortgage in 1989 is paying much less now due to lower interest rates - does that mean housing cost inflation is negative...?)

That doesn't mean that central bankers shouldn't take into account asset prices - and asset price bubbles - when deciding policy, but that is different to being in an inflation index.

Hedonic adjustments (and basket adjustments) ARE an art form - but a necessary one. What would the point be of still having the price of (say) a Morris Minor in the index, or not having prices of curry restarants in the index? But because of those changes, the index is not comparable with 1955.

And reweighting can bias inflation up. Take haircuts. Because haircuts are so labour intensive, price goes up faster than general inflation, and, over time, their weighting (and, in fact, most service related items) increases, giving an upwards bias. E.g. if you compare the basket of 50's and now, there has been a marked decrease in food weights, and marked increase in restaurant/ eating out weights.

Low inflation is very important because it allows us (as consumers) to really get an idea of relative changes. When inflation is high, price signals get lost in the noise. When inflation is low, relative changes in price (e.g. DVD's getting cheaper, fuel getting more expensive) then drive real changes in consumption

Note that one of the main arguments for an HPC is that rents/ prices have got out of whack - suggesting that the inflation rate is "correct", house prices are a bubble.

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The CPI doesn't include costs of living, i.e. mortgage costs, council tax etc...

The RPI does. I hate it when people say inflation is 2%, its not its 2.9%! CPI was only adopted by the government in recent years as it is lower... People should only compare the RPI figures.

Oh, and Good Morning!

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Er....this is rather heady economics for me, but can I ask a few simple questions:

1. Is the fact that house price inflation is never included in government inflation figures part of the "hedonic" conspiracy?

2. Why is it not a national scandal that the entire media and establishment seems to accept house price inflation not being included in so-called inflation announcements?

3. What would the inflation figure be for say, May 2004, if house inflation was included?

4. Why does no economist (apparently) EVER complain that house price inflation is never included in inflation figures?

5. Is it that NOT including house inflation in "inflation" figures is so obvious, so blindingly clear, that everyone thinks they would be thought of as stupid if they mentioned it?

I think I got my point across, but I am not sure. Forgive me if I am naive and stupid. Are there any other naive and stupid people here who wonder the same thing?

VP

1. No

2. Because the government uses several measures of inflation, and house price costs are included in RPI, which is the one used to increase pensions and benefits.

3. 2.8%.

4. Because the government still publishes RPI every month, so they have access to the data.

5. Yes, pretty much. It's not that they want to exclude house prices as such. The main contribution house prices make to the cost of living is in mortgage repayments. If you include mortgage repayments in your inflation measure, then when you increase interest rates in order to bring inflation down, inflation immediately increases. This is felt to be a bad thing.

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Yeah right, including housing. Are you joking or do you seriously believe this number?

But wait a minute, maybe it's per month.... not year. In that case I would say it's a tad high....

Edited by cgnao

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However, there are some indications that the BOE and other central banks are considering including house prices in the inflation measure:

Yeah they would know they're going down!

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Hedonic adjustments (and basket adjustments) ARE an art form - but a necessary one. What would the point be of still having the price of (say) a Morris Minor in the index

I'm fine with basket adjustments. After all, if no-one is buying a specific product anymore it has no right to be in the goods and services basket for calculating the inflation measure. However my understanding of hedonic adjustments (and I may be wrong) is this: if a product increases in functionality (the classic example is PC's: a £500 PC bought today will likely be much faster, have more memory, come with more free peripherals, etc than a £500 PC bought 5 years ago) the statisticians actually interpret that as a decrease in price. So, for example if a new Vauxhall Corsa in the future still costs around £7000, but had much better brakes, fuel economy, safety, etc, they would actually count that as the price of Corsas having decreased (whcih they haven't; they're still £7000); I think that is wrong and a distortion. It doesn't matter how "good" the products are that people are buying, what matters is that they ARE buying them and what the average price of those purchases is. Also I feel the weighting of the CPI is too much towards rarely-purchased items/durable goods (TV's, DVD players, fridges, etc) and not enough towards staples like food, fuel, energy, heating, etc.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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