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Quality Adjustment at Scale: Hedonic versus Exact Demand-Based Price Indices

Gabriel Ehrlich¹; John Haltiwanger²; Ron Jarmin³; David Johnson⁴; Ed Olivares⁵; Luke Pardue⁶; Matthew D. Shapiro⁷; Laura Yi Zhao⁸

¹ University of Michigan (email: ) · ² University of Maryland and NBER (email: ) · ³ US Census Bureau (email: ) · ⁴ University of Michigan and International Association for Research in Income and Wealth (email: ) · ⁵ University of Maryland and US Treasury (email: ) · ⁶ University of Maryland and Aspen Economic Strategy Group (email: ) · ⁷ University of Michigan and NBER (email: ) · ⁸ University of Maryland and Bank of Canada (email: )

Item-level transactions data yield cost-of-living indices that can account for quality change and consumer substitution. Transactions data require confronting the rapid turnover of items because prices of new and existing products are interrelated in equilibrium. This paper evaluates multiple approaches to measuring quality change at scale. It shows that a hedonic superlative approach—using econometrics or machine learning for hedonic estimation combined with index formulas that require simultaneous observation of item-level price and expenditure—yields improved measures of the cost of living. Accounting for ubiquitous quality change and for consumer substitution yields lower measures of inflation than traditional, official methods. (JEL C43, C45, E31, L15, L81)

DOI

10.1257/aer.20230766

Volume

116 (6)

Pages

1955-1995

Language

en

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