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Sept. 14, 2022, 12:52 p.m. EDT

How can Apple hold the line on iPhone prices amid soaring inflation?

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By Jay L. Zagorsky

Inflation in the U.S. is surging  to near a 40-year high, with prices on food, fuel and pretty much everything seeming to rise more every month.

Smartphones may be an exception.

Apple /zigman2/quotes/202934861/composite AAPL -1.96% , for example, recently announced its new versions of the iPhone and other gadgets, and  turned a lot of heads  when it said it wouldn’t charge more despite higher costs to make the devices.

Therese Poletti: Tim Cook didn’t have ‘one more thing,’ so Apple offered consumers a break, for once

This is puzzling because  companies typically raise prices  in line with inflation—or at least enough to cover the increased costs of making their products.

Consumer price data tells an even more befuddling story. The latest consumer price index data suggests  smartphone prices are actually down  20.4% in August from a year earlier, according to an index released on Tuesday. That’s the biggest drop of any detailed expenditure item the Bureau of Labor Statistics tracks, and contrasts with the overall 8.3% increase in prices.

What’s going on?

As  an economist  teaching  business school students , I enjoy exploring and explaining these economic puzzles. I believe there are two basic explanations—one for the BLS data and another for Apple.

Why consumer prices on smartphones fell

The story behind the consumer price index data is easier to explain, if a bit technical.

The 20% drop over the past year isn’t unusual for smartphones. In fact, according to the index, they almost always go down from month to month. Since the end of 2019, smartphone prices have come down a whopping 40%.

And though smartphones are showing the biggest drop in the index, tech gear more broadly—from computers to smartwatches—also tend to fall over time. In the previous 12 months, televisions are down 19% and what the government calls  information technology commodities are down 8.8% .

Part of the reason for their steady decline is found buried in the  Bureau of Labor Statistics website . The consumer price index tries to measure a  constant quality  of goods and services in the economy. This means it seeks to track the price changes of the exact same set of goods and services each month. It’s comparing the price today with the price of the exact same thing a month or year ago.

For most goods, it’s not really an issue because their quality doesn’t change much over relatively small periods of time. For example, an apple you bite into today is pretty much the same as an apple you ate a year ago.

Smartphones and other technology-heavy gadgets are different. Because smartphones  are constantly improving in quality —with the latest updates of an iPhone or Samsung /zigman2/quotes/209800866/delayed KR:005930 -0.65% Galaxy  awaited breathlessly  every year—it is more difficult to ensure you’re comparing prices of products of the exact same quality.

For rapidly improving items, the Bureau of Labor Statistics uses what are called “ hedonic regression models ” to estimate these changes in quality over time. Hedonic models measure the same amount of satisfaction. While this sounds complicated, the goal is simple: to figure out how much each new smartphone feature changes the price.

As a consumer, you are essentially doing this whenever you decide whether it is worth paying the extra money for that marginally  better camera or extended battery life  when buying a new phone.

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