Why smartphones have weakened by 22% while almost everything else is more expensive

The closely watched Consumer Price Index continues to show that US headline inflation is running 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. Overall, 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 is tracked by the CPI recorded a drop of 22%.shows deflation: Smartphones.

That might seem counterintuitive. Most phones are expensive, and the prices of the best ones are not falling. Apple introduced new iPhone devices in September same US prices like last year’s options, for example. And Samsung’s high-end devices cost like as much as $1,800 this year. Average selling prices of smartphones keep climbing in markets around the world.

Turns out smartphones aren’t getting any cheaper. They are getting better. And that’s why the CPI shows them deflating instead of inflating like many other commodities.

Here’s why: Typically, the CPI likes to compare prices for identical items that don’t change much from year to year. So it can, for example, compare eggs with eggs. But in the case of smartphones, BLS has to control devices that are getting better every year. If smartphones improve and the price stays the same, then the BLS sees the price drop.

“There’s been a lot of decline [smartphone] index. And that’s largely just about quality improvements,” said Jonathan Church, an economist at the BLS.

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

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

Next, the BLS performs a “quality adjustment.” If the price of a new iPhone hasn’t gone up, but it’s got new features, then the CPI would consider that device to be more valuable than the old one and assume that consumers will get more value for the same money.

The size of the quality adjustment is estimated using a hedonic modeling method, and the BLS uses data from a third-party dataset that includes smartphone specifications.

Or, like The BLS says: “If the 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 include the estimated value of the difference in quality.”

The 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 falling since 2019, according to the CPI.

Eventually, Church said, smartphones could mature into the kind of product that will experience price increases and inflation. But the rate of improvement would have to slow.

“It’s really only at a certain mature point in the cycle that their price will start to rise again,” Church said. “It still seems to be pretty early in the lifecycle, smartphones in general.”