May 26, 2017 Reading Time: 2 minutes

How much is unlimited data on your iPhone worth to you? In calculating the Consumer Price Index, the average answer is “a lot” — enough to explain a perceived slowdown in inflation, in fact.

As other outlets have reported recently, a change in cell service was a major contributor to slowing price inflation in the last couple months as reported in the CPI. The change shows the difficulty in measuring price changes when consumers are substituting into new products that are similar but nonidentical to existing products. In this case, how do we think about the price of cell phone plans in general when a more expensive but unlimited data plan option is added?

The CPI is calculated by measuring price changes in a representative basket of goods and services. In the current calculation, “education and communication services” make up 6.2 percent of the CPI. A little more than a third of that category is for “telephone services,” and about 70 percent of telephone services are “wireless telephone services.” Overall, wireless telephone services have a 1.576 percent weight in the overall CPI.

Wireless prices often decline, but one important recent development has been Verizon’s decision in February to revive unlimited-data plans. For example, Verizon offered a fixed-data plans between $35-70, depending on the amount of included data, and now also offers an unlimited-data plan for $80. The Bureau of Labor Statistics has an established methodology for accounting for simultaneous changes in price and quality, and in this particular case the methodology clearly determined these new plans are lowering the effective price of wireless telephone services. The month-to-month price in the category declined 1.4 percent from January to February and 1.7 percent from March to April, but 7 percent from February to March — the period when the Verizon plan was introduced.

Let’s do some quick and dirty math to see how big this could be to the overall CPI. While two data points hardly make for a convincing trend, let’s just suppose the change from February to March would have been 1.5 percent without the new plans, similar to the declines in the month before and after. Then 5.5 percentage points of the decline came from the new plan, and overall CPI growth would have been 0.087 percentage points higher between February and March without the new plan. This seems small, but the actual month-to-month CPI change between February and March was only 0.081 percent. With a 1.5 percent decline in cell prices instead of 7 percent, total month-to-month inflation would have been 0.168 percent — twice the actual growth rate. Annualized, this is the difference between a slowdown to 1 percent annual CPI growth and the actual 2 percent in recent years. In the larger picture, this is a minor blip in calculating inflation, but it is a good illustration of the complexity in measuring prices in a changing marketplace.

Patrick Coate, PhD

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