• the fact that hedonics methods are being applied only to items that were previously quality adjusted by other BLS techniques.

CPI hedonics models are only used to adjust a subset of substitute price quotes: that is, to control for quality change when a product that has disappeared from the shelf must be replaced by a noncomparable one. Hedonic adjustments have not been used to offset quality differences associated with item turnover generated by outlet rotation or with respecification of the CPI basket. This is an important distinction because implicit forms of quality adjustment (such as deletion) are already a feature of the in-store item substitution process. As currently used, hedonics is simply replacing another method of quality adjustment, and the item-by-item effect on index growth has been minimal and its direction ambiguous. In some cases, BLS’s hedonic models implied price adjustments that would have been larger than the standard (deletion) adjustment actually used; in others the adjustment would have been smaller.32

A more broadly based application of hedonic techniques—one that extended beyond routine item replacement cases caused by sample attrition to one that, for example, was also applied to price changes associated with new models appearing as a result of sample rotation—would be expected to have a larger effect on the index. For example, Moulton et al. (1998) simulated an index for televisions that did include hedonic comparisons of items that entered the CPI through sample rotation. Their analysis, which tracked product characteristics over a 5-year period, resulted in a much larger downward adjustment than a simulated index that applied hedonics only to in-store item replacements. The authors argue that sample rotation may be particularly important for TVs since, unlike computers, when models with new features appear on the market, older sets of characteristics (models) remain available for a long time. This means comparable replacements can continue to be found, and commodity analysts need not turn to more radically changed models. Cutting-edge models, even those that quickly gain in market share, seem more likely to enter the CPI when outlet and item samples are rotated (Moulton et al., 1998:12).

Moulton et al. (1998) recommend developing hedonic adjustment and data collection techniques that would make it possible to apply hedonics methods when new products enter the sample during outlet rotation. They also suggest changing the item replacement rule to have field agents select items that are more

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This evidence does not speak to questions about the extent to which adjustments are becoming more accurate; matched model (replacement or class-mean) adjustments may conceivably overstate or understate the impact of quality change on price and, while hedonic regressions produce additional evidence about this, the value of the additional information is dependent on the validity of the model and the quality of underlying data used in its estimation.



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