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MACRO VIEW COLUMNS: Consumers Wonder Why Phone Bills Rise as Prices Fall

(Bloomberg) — This week brings the issue of pricing in the mobile communications industry into focus. Tuesday saw the launch of Apple’s new suite of products, including an iPhone X that will cost more than $1,000. Yet recently collapsing prices in cellular phone services, including a further 0.8% monthly decline in Wednesday’s U.S. PPI report, have helped push key inflation rates low enough that both the market and the Federal Reserve wonder how much more tightening the FOMC can get away with. Consumers and even bond traders may be justified in asking, “if prices keep falling, why does my bill keep going up?”

  • While commoditized products like DVD players have fallen sharply in price over the years, the bill for sexier goods like top-line smart phones or automobiles continues to rise. Yet it’s indisputable that you get more for your money; the engine in today’s Toyota Highlander XLE generates about 40 more horsepower than that in a Ferrari 308 GTB four decades ago. Accounting for this quality improvement is known as a “hedonic adjustment” and is one of the primary factors lowering the effective price of many goods
  • Many people feel frustration at official data that show declining prices even as their outlays rise because they don’t account for improved quality. However, it is reasonable to question whether economists can accurately place a dollar value on quality improvements and if there is a systematic bias toward adjusting prices too far down
  • By taking the number of U.S. households and comparing it with the personal spending data, we can estimate an average annual spend per household on things like cell phone services and phone hardware. Comparing these figures with the underlying PCE price data shows just how much hedonic adjustments matter
  • This methodology suggests that U.S. households currently spend about $144 per year on telephone hardware. That’s up substantially over the last couple of decades, even as the price index for phones has fallen 92%
  • We can observe a similar phenomenon in wireless services. Annual outlays are currently estimated at nearly $1,000 per household – – yet the official data suggests prices have collapsed. Better networks, more data, etc explain the discrepancy
  • Yet the fact is that households do spend more of their wage packets on mobile telephony than has historically been the case — and that ultimately is what consumers are sensitive to
  • Moreover, something looks wrong with the adjustments that have driven the latest bout of wireless service deflation. When the new Verizon pricing model first showed up in the data, prices collapsed — and so did nominal outlays. Yet spending bounced straight back even as prices kept falling. The upshot is that in real terms, consumers spending in wireless services has risen 12% since January, the largest six-month increase in 15 years
  • Maybe that is correct — or maybe the price data is wrong and will eventually be revised higher. If and when that happens, the current disinflation scare will look like a storm in a teacup — and traders will wonder how they could price in so little for the Fed
  • NOTE: Cameron Crise is a macro strategist who writes for Bloomberg. The observations made are his own and are not intended as investment advice.

To contact the reporter on this story: Cameron Crise in New York at ccrise6@bloomberg.net

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