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Why smartphones are getting cheaper in the CPI

Shoppers queue as outside the Apple Store on the launch day of the new iPhone 14 series smartphones in Hong Kong on September 16, 2022.

Miguel Candela | Anadolu Agency | Getty Images

The closely watched Consumer Price Index continues to show headline inflation in the United States at levels last seen in the mid-1980s.

Prices for a wide variety of goods and services, including food, plane tickets and gasoline, rose in the latest reading released last week. In total, over 12 months, headline inflation rose 8.2%, according to the Bureau of Labor Statistics, which publishes the CPI.

But one product category monitored by the CPI saw a 22% drop, in deflation: smartphones.

This may seem counter-intuitive. Most phones are expensive, and the prices for the best don’t go down. Apple launched new iPhones in September at the same US prices as last year’s options, for example. And Samsung’s high-end devices cost up to $1,800 this year. Average Smartphone Selling Prices keep climbing in markets around the world.

It turns out that smartphones are not getting cheaper. They are improving. And that’s why the CPI shows them deflating instead of inflating like many other goods.

Here’s why: Normally, the CPI likes to compare the prices of identical items that don’t change much from year to year. So he could compare eggs to eggs, for example. But in the case of smartphones, BLS must control the devices that improve every year. If the smartphones improve and the price stays the same, then BLS sees a price drop.

“There have been many declines in the [smartphone] index. And a lot of it really has to do with quality improvements,” said BLS economist Jonathan Church.

Twice a year, BLS reviews new smartphone models and measures their improvement, whether they have better cameras, displays or other new features.

“For smartphones, we’re talking about things like screen size, RAM, processor speed, the phone’s camera or the rear camera, whether it’s foldable or things like that,” Church said.

Then BLS performs a “quality adjustment”. If the price of the new iPhone did not increase, but it received new features, the IPC would consider this device to be more valuable than the old one, and it assumes that consumers are getting more value for the same price. .

Estimation of the size of quality adjustments is done using a hedonic modeling method and BLS uses data from a third-party dataset that includes smartphone specifications.

Or, as BLS says so: “If a replacement smartphone is different from its predecessor and the value of the quality difference can be accurately estimated, a quality adjustment may be made to the price of the previous item to include the estimated value of the difference quality.”

BLS indexed smartphone technologies to a starting point in late 2019, when Apple’s latest device was the iPhone 11 and Samsung’s best was the Galaxy S10. In fact, smartphone prices have been deflating since 2019, according to the CPI.

Eventually, Church said, smartphones could become the type of product that sees price increases and inflation. But the rate of improvement should slow down.

“It’s really only at a certain point of maturity in the cycle that their price will start to rise again,” Church said. “It still seems quite early in the life cycle of smartphones in general.”

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