"The Doctrine Of Pleasure" And Arbitrary Power
The Fed uses rents rather than home prices when calculating inflation. Without going into the merits of that, this WS Journal article examines the use of hedonics in the pricing formulas. "The principles of hedonics, an arcane statistical technique that’s become a flashpoint in a debate over how the U.S. government measures inflation. Hedonics is essentially a way of accounting for the changing quality of products when calculating price movements."
"If someone is paying the equivalent of $500 a month in rent for several years, the rent has actually gone up as the unit ages and becomes less desirable, according to the government." Good point; so why should existing home prices go up?
"Bill Gross, head of the world’s largest bond fund, Pimco, caused a stir last fall by claiming the way the CPI is calculated amounts to a 'con job' by the government aimed at concealing the true rate of inflation. A key culprit, he said, was the CPI’s growing reliance on hedonics."
"The CPI 'takes something you can’t really measure and applies a metric to it in ways that are arbitrary,' he says. 'There ought to be some kind of warning label on inflation numbers that are derived from hedonic pricing.'"
"Economist David Johnson, who heads the CPI program at the bureau, says, 'There’s no doubt the analyst has to make decisions about what’s comparable and what’s not, and where adjustments should be made.'"