for the rapidity of item replacement) and not random over items independent of weight.

The issue of how to assess service expenditure categories will also pose special problems. One can imagine that the quality of various consumer services changes substantially over time, and certainly not always for the better—think of airline travel for instance. In principle, methods such as hedonics that are used to identify and adjust prices of quality-changed goods can also be applied to services; in practice, for many services, the problem of how to define output appropriately must first be solved. The above recommendation identifies one element in what should be a broad-based hedonics research program.

Recommendation 4-2: BLS should continue to expand its experimental development and testing of hedonic methods and its support of relevant outside research. This research should not be confined to that relating to price adjustment but should also examine the role of hedonics in statistical audits of the other BLS quality adjustment methods and in the review of replacement item selection procedures and comparability decisions.

The above recommendations do not suggest that BLS should immediately expand the use of hedonics in constructing component indexes for its flagship CPI. In fact, the panel takes the opposite position.

Recommendation 4-3: Relative to our view on BLS research, we recommend a more cautious integration of hedonically adjusted price change estimates into the CPI.

This recommendation is based on theoretical considerations, not on empirical grounds. As documented above, the recent BLS expansion of hedonic price adjustments to appliances and electronics has not had a large impact on those item subindexes. The current hedonics program, which only replaces other quality adjustment techniques, actually has an ambiguous effect on index growth. Thus, for practical purposes, the apparent rapid expansion of the use of hedonics is not a pressing empirical concern for those interested only in the accuracy of the final CPI numbers.

Our conservative view on integrating hedonics techniques has more to do with concern for the perceived credibility of the current models. While there is an established academic literature on estimating hedonic functions, researchers are much less experienced using them across a wide variety of goods in price index construction. Thus, while members of the panel agree that BLS and others should continue to research the viability of hedonics, the methods may, in their current state of development, only be justifiably applied to a narrow class of goods. The list of unresolved econometric specification and data issues that may inhibit fully informed use of hedonic quality adjustment is a long one.



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