Why smartphones are getting cheaper in the CPI

Shoppers queue as outside the Apple Store during 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 monitored consumer price index still shows headline inflation in the US hovering at levels last seen in the mid-1980s.

Prices for a wide range of goods and services, including food, airline tickets and gasoline, rose in the latest reading released last week. All told, on a 12-month basis, headline inflation rose 8.2%, according to the Bureau of Labor Statistics, which publishes the CPI.

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

That may seem counter-intuitive. Most phones are expensive and the prices for the best are not going down. Apple released new iPhones in September at the same US prices as, say, last year’s options. And Samsung’s high-end devices cost a whopping $1,800 this year. Average selling prices for smartphones continue to rise in markets around the world.

It turns out that smartphones are not getting cheaper. They get better. And that’s why CPI shows they deflate rather than inflate like many other commodities.

Here’s why: Normally, the CPI likes to compare prices for identical items that don’t change much from year to year. So, for example, it can compare eggs with eggs. But in the case of smartphones, BLS has to check for devices that get better every year. If smartphones improve and the price remains the same, BLS registers a price decrease.

“There are many declines in the [smartphone] table of contents. And a lot of that actually has to do with the quality improvements,” said Jonathan Church, an economist at BLS.

Twice a year, BLS looks at the new smartphone models and measures how they’ve improved — whether they have better cameras, screens, or other new features.

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

Then BLS makes a ‘quality adjustment’. If the price of the new iPhone didn’t go up, but got new features, the CPI would see that device as more valuable than the old one, and assume that consumers get more for the same money.

Estimating the magnitude of the quality adjustments is done with a hedonic modeling method and BLS uses data from a third-party dataset containing smartphone specifications.

Or, as BLS puts it: “If a replacement smartphone differs from its predecessor and the value of the difference in quality can be accurately estimated, a quality adjustment can be made to the price of the previous item to estimate the value of the difference in 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 the Galaxy S10. According to the CPI, smartphone prices have actually been falling since 2019.

Eventually, Church said, smartphones could become the kind of product that would see price hikes and inflation. But the pace of improvement should slow down.

“It’s really just that at some mature point in the cycle that their price starts to rise again,” Church said. “It seems quite early in the life cycle, smartphones in general.”

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