"Our findings indicate that the current deflator [for the Telecomms industry] is upward biased and that telecommunications services prices could have fallen between 35% and 90% between 2010 and 2015, considerably more than the current deflator, suggesting the need for continued research in this area."
"For instance, telephone and telefax equipment and services accounts for about 3% of aggregate CPI, if one applies an average improvement in quality of 35% for every year between 2006 and 2014 to reflect the average increase in data traffic within this period,then accounting for the greater benefit associated with the internet connection would lower overall CPI inflation by slightly more than one percentage point per year over the period considered."(the 90 percentage point drop in the ESCoE range would equate to an annualised improvement of more than 35%pa)
It would seem to depend on what a quality change actually is.
One question would be to ask how much of the increase data traffic is associated with advertisements.
I suspect that, though my use of the web has not changed that much since the mid-nineties when I started, I will soon have to upgrade to fibre because of the advertisement load. Adverts used to be single small graphics and now they tend to be elaborate videos which take up a lot of band width. I would tend to classify this as a loss of quality through forced quality change.
There is also poor design of web pages. For example, the BBC used to have an excellent text based news service on the web with very few graphics which would load quickly whatever the download speed. They stopped that sadly.
Now my use of the web may be very different from the typical user given my background but looking at the profitability of Facebook and Google would suggest that there is an issue here.
Arguably there is a difference between a deflator for the Telecomms industry and both the macroeconomic CPI and a household index like RPI and its likely replacement in HII/HCI.
All the best.
Thanks for the reminder about speeds becoming lower.
Effectively what consumers are buying is a share of the bandwidth that is available from the exchange. So we are all competing for bandwidth with our neighbours. As more people use the bandwidth for more purposes – and why wouldn't they as they are paying for it – then speeds drop.
I had hoped that as more of my neighbours moved to cable that my bandwidth on copper wire would increase. However I suspect that the provider has simply reduced bandwidth on copper to coerce people to move to cable and pay the higher cost– a bit like the old razor blade marketing trick.
A commercial company's primary objective is to get the consumer to pay more not to provide a better service or product.
Packet switching technology may allow more data to travel on a single wire or cable but it only provides so much capacity.
Thank you for mentioning this. As a matter of fact, one member of the RPI CPI User Group, Shaun Richards, devoted his entire January 18 blog to the same article you referenced:
I glanced at the ESCoE discussion paper then but didn't read it. You encouraged me to read it, so thank you for that.
It seemed to me the paper conflated quality adjustment issues and issues relating to index number formulas as to the reason why the deflator was showing too much inflation. The paper starts by saying that a superlative index (actually any index that passed the time reversal formula would do) like the Fisher would be a better measure of price change than a Laspeyres index. Later on this thought is simply dropped. The SPPI is a Laspeyres index, with basket that is updated every five years, like the other UK producer price indices. (It is a better index of this kind than similar Canadian producer price indices, since when a new basket is introduced its basket reference period doesn't start with the basket reference year but with an earlier year if it is judged more relevant. For example, the 2010 basket took effect in 2009 rather than 2010.) As I understand it, the paper not only calculated new price indices for diferent items in telecommunications services, but aggregated them using a Paasche or a chain Paasche formula. One would generally expect a chain Paasche or Paasche index to show less inflation than a Laspeyres index for the same item indexes.
The paper notes that the CPI uses a chain Lowe index formula, so there is less upward substitution bias for its formula than for the SPPI. Nevertheless, it can't compare with a chain Fisher index , a chain Walsh index (like the Swedish CPI) or a chain Edgeworth index, which would pretty much eliminate substitution bias completely. This is tangential to the main thrust of the paper, that quality improvements in services were not being properly accounted for. Just the same, it isn't unimportant. For ICT products, the choice of formula is almost certainly more consequential than for most other consumer products.
You tell a tidy story: quality adjustment for telecommunications services is inferior, therefore the CPI inflation rate tends to be too high year after year, fix the problem and the measured inflation rate will tend to be lower. My issue, the better treatment of seasonal goods in the CPI, by contrast, is a messy story. Things are being done wrong, if you were to do them right a lot of things would have to change, including the convention that the annual index is a simple rather than a weighted average of its monthly index numbers. Index reform would cause the inflation rate to be higher than the unreformed index sometimes, lower other times, but it wouldn't likely remove any persistent upward or downward bias in the index. This is probably why members of the group seem more willing to engage in your issue than in mine. However, thank you for drawing attention to it, as it is an important issue.Best regards,Andrew