Hedonic regression decreases the measurement of inflation because it says that the actual price does not incorporate all of the value one receives from an item.

Government statisticians are looking be looking to measure the effective price including all non-price improvements.

For example, if I bought a car for $11,000 that sold for $10,000 last year the price change is 10%. However, I may enjoy technological and safety feature improvements over the equivalent vehicle from last year (say I got side air bags for no extra cost).

What the government then does is adjust the 10% change down to reflect the fact this hidden value. This would be as if I bought the car for $10,700, say.

It’s the same concept as when a homebuilder selling a house to you keeps the actual price of the house the same but throws in closing costs or some other goodie. That makes the effective price to you lower.

Edward

Not so?

Real GDP uses the GDP deflator; not the CPI”

That’s a given. Why are you commenting on it. If you want to see how different the two are, go to this post here:

http://www.creditwritedowns.com/2008/05/revised-gdp-number-pure-fiction.html