Apparel Prices and the Hulten/Bruegel Paradox

While the CPI may have overstated inflation in the mid-1990s by about one percent per year, as concluded by the Boskin Commission, it does not make sense to extrapolate that rate of bias backwards over long periods of time. The "Hulten-Bruegel paradox" shows that any such exercise in backward extrapolation yields levels of real consumption two or four centuries ago that are implausibly low, barely providing an average household with a pound of potatoes per day, with nothing left over for clothing or shelter. The paradox raises the possibility that at some point in the past price index bias, at least for some important products, may have been zero or negative rather than positive. This paper studies apparel prices over the long period 1914-93, developing new price indexes based on data from the Sears catalog for the entire period 1914-93. The research is based on roughly 10,000 exact comparisons for a matched model index of many different types of apparel, and on a much smaller number of observations on the prices and quality characteristics for a hedonic price index of womens' dresses. The Sears matched-model indexes do not exhibit a consistent negative or positive drift relative to the CPI. For womens' apparel the drift is always negative but for mens' apparel there is a turnaround, from negative before 1965 to positive thereafter. Both the matched-model indexes and the CPI rise less rapidly for womens' apparel than for mens' apparel, which would be consistent with the hypothesis that price changes accompanying model changes (and thus linked out of both the Sears matched-model index and of the CPI but not in the hedonic index) are more frequent for womens' apparel, since models change more frequently. The hedonic price index for womens' dresses always increases faster than the matched-model index. It also increases faster than the CPI for dresses in each time interval except for 1965-75. To the extent that the Sears hedonic and matched model indexes are based on the same data, so that systematic differences between catalog market shares and pricing policies are not relevant, the results provided here may offer a nice complement to past research on computer prices, which also found that price changes were contemporaneous with model changes. Just as hedonic price indexes for computers almost always drop faster than matched-model indexes for computers, we have found the opposite relationship for apparel prices, although presumably for the same reason. The results in this paper raise the possibility that price indexes for goods subject to frequent fashion or taste changes may incorporate a significant downward bias. Further research is required to study whether this difference between hedonic and matched model indexes for apparel is systematic across types of apparel or is limited to womens' dresses. Any systematic tendency for hedonic indexes to increase faster than the Sears matched-model indexes and than the CPI would provide evidence of a downward bias in the CPI for apparel in the past, thus helping to explain the Hulten-Bruegel paradox. Robert J. Gordon Department of Economics Northwestern University Evanston IL 60208-2600 1-847-491-3616 [email protected]