Hedonic methods were first applied in the CPI during the early 1990s to apparel categories. Initially, the technique was used to develop criteria for identifying appropriate comparable replacements for disappearing items. Shortly thereafter, it evolved to its current use as a tool to filter out the quality-driven component of observed price changes associated with item replacements. For apparel and most other items, hedonics is typically used to make one-time quality adjustments (using the indirect method) when new items replace outgoing ones.24

Since January 1999, hedonic analysis of computers and televisions has been incorporated into the official index. The TV index was considered a good candidate since models undergo frequent but nonradical quality change and also because TVs occupy an entire item stratum. The latter feature is convenient because it allows the elementary index to be constructed without combining separate substratum item indexes calculated using different methods. For TVs, a semilog functional form is used to adjust observed prices to account for variable quality characteristics, such as screen size, wide screen, display, projection, and surround sound. Equations must be respecified as new features appear, which become new explanatory variables (Fixler et al., 1999:10). An indirect approach, as described above, is used.

BLS has also tapped into research done for the producer price index (PPI) to develop hedonic regressions for large-scale and network as well as desktop computers. Hedonic adjustments have been used in the PPI since 1990, and application to the desktop computers stratum of the CPI was incorporated in January 1999. Explanatory variables include such characteristics as chip speed, system memory, and monitor type and size (Fixler et al., 1999:11). Since computer technology changes rapidly and the relationship between computer features and value appears unstable, regressions have been respecified frequently (every 3 to 12 months). For 1998, the first year that hedonic regressions were used to adjust computer prices, the price index for personal computer and peripheral equipment was reduced by 6.5 percent, relative to what it would have been had the new method not been implemented.

A hedonics technique has also been applied to the “rent of primary residence” and “owners’ equivalence” components of the index since 1988. A more restrictive type of the indirect hedonic method is used to estimate only the effect of aging on the value of housing units. In the application, rents are adjusted for age using a nonlinear (age and age-squared variables) specification.

Items Targeted by the Recent CPI Hedonics Initiative

The BLS is currently conducting research that will extend the use of hedonic regression models to additional CPI items. Kokoski (1993:12) states that “for

24  

Interestingly, over the last six months of 1991, using hedonics raised the rate of price change for the apparel category by 0.4 percent per year (Liegey, 1994).



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