Hedonic Warfare Erupts Between Gross, Poole & Berry

by: David Jackson

PIMCO manager Bill Gross' assertion that the government uses hedonic adjustments to understate the CPI is proving to be controversial. Repeated use of the word "con job" in his article probably didn't help. Bloomberg columnist John Berry wrote a detailed rebuttal, and now Gross has taken the unprecedented step of writing a follow-up less than two weeks after the original, depite the fact that his Investment Outlooks are supposed to be monthly.

Here are some key quotes from Berry's rebuttal and Gross' follow-up:


On hedonic adjustments and substitution adjustments:

...few if any economists question the need to adjust for quality changes. Rather many of them complain that BLS quality adjustments don't go far enough.

...the impact of hedonics on the change in the CPI is grossly exaggerated. Its use has essentially no impact on the overall index because some hedonic adjustments tend to raise the inflation rate, offsetting others that tend to lower it.

BLS economist Patrick Jackman said in an interview that the overall impact of hedonic adjustment on the rate of change in the CPI is ``virtually zero.'' From 1997 to 2003, the use of hedonics may have lowered the cumulative rise in the CPI by 0.1 percent, he said.

On the use of "core" inflation instead of the CPI

The argument for excluding food and energy prices isn't that those prices don't matter. Rather, the concern is that they often are highly volatile with large increases often partly or wholly reversed.

...quirks in the federal milk price- support program caused fresh whole milk prices to jump 14.7 percent in May and an additional 3.7 percent in June before falling 2.2 percent and 4.4 percent respectively in July and August. Should that matter very much in setting interest-rate policy?

...over longer periods of time, a focus on the core hasn't minimized inflation. For example, since 1989 the annual increases in the core have exceeded that of the overall index in eight of the 14 years, most recently in 2002.

Berry's conclusion

The real surprise about Gross's column -- something that might have added credibility to the notion of Greenspan and a conspiracy to have a low inflation rate -- is that he fails to mention the Fed chairman's frequent assertion that the CPI overstates -- yes, overstates -- inflation by perhaps as much as a percentage point a year. How could Gross have overlooked that smoking gun?


I did not dispute the fact that the quality of goods and even services can improve and that the government shouldn’t recognize that “hedonically.