Hedonics and the Consumer Price Index

The paper begins by explaining the rational for the use of hedonic price indexes. It then reviews the problems that in the past have been associated with incorporating hedonics in the Consumer Price Index. The paper shows that many of those problems can now be overcome, though some care in choice of techniques used to implement the hedonic procedure is necessary. There are two important issues with hedonics that remain; that of sample attrition, and the fact that the index is designed as an upper bound to the required price adjustment (and hence may be overly generous). The paper shows that there is a very real sense in which both of these issues are likely to be more problematic for the more traditional matched model indices than for hedonics, and hence should not delay the role out of hedonics. Finally the paper provides suggestions for research to determine which commodity groups are likely to be most affected by attrition and the lack of tightness of the upper bound, and then considers ways to ameliorate these problems when they arise.