Inside The “Low-flation” Myth: A Disquisition on Inflation That Is Seen And Not Seen—Part 2

David Stockman reports:

New car prices are a good introduction to the world of inflation seen and not seen. The National Auto Dealers Association (NADA) has been reporting a consistent figure for the average price of new vehicles for several decades. It represents actual transaction prices in dealer showrooms net of rebates and discounts. In round numbers, the NADA reported average price per new vehicle at the time of Greenspan’s irrational exuberance moment was $22,000. Seventeen years later it is about $32,000 or 50% more.

Not so much says the BLS—you’re forgetting those pesky “hedonic” adjustments. In fact, owing to ten standard airbags, XM radio, run flat tires etc., the “adjusted” price of new cars today is—drum roll, please— exactly where it was in 1997! Thus, notwithstanding the interim dip shown in the BLS index below, the trend difference in the two measures could not be more dramatic: 0% inflation over the past 17 years as the BLS confects it; 50% as the car dealers report it.

Needless to say, hedonics is at best a subjective thing. There certainly is some significant part of the car-buying population, for example, that would weigh the utility gained from their nest of air-bags as not even remotely off-setting the loss of utility from reduced horsepower, acceleration speeds and towing capacity. In short, the bean counters at the BLS should stick to tabulating the sticker prices and leave hedonics to the marketplace. That’s what its for.

Ouch.