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Measurement Error in the Consumer Price Index: Where Do We Stand?

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  • David E. Lebow
  • Jeremy B. Rudd
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    Abstract

    We survey the evidence on CPI bias and provide our best estimate of its magnitude. We also identify a "weighting" bias that has not been quantified previously. We estimate that the CPI currently overstates the rate of change in the cost of living by about 0.9 percentage point per year, with a confidence interval ranging from 0.3 to 1.4 percentage points. Our estimate is boosted by new evidence that substitution bias has increased sharply since the mid-1990s, and is reduced by the cumulative impact of a variety of recent improvements to BLS procedures. The study discusses potential areas for further improvement.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/002205103321544729
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    Bibliographic Info

    Article provided by American Economic Association in its journal Journal of Economic Literature.

    Volume (Year): 41 (2003)
    Issue (Month): 1 (March)
    Pages: 159-201

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    Handle: RePEc:aea:jeclit:v:41:y:2003:i:1:p:159-201

    Note: DOI: 10.1257/002205103321544729
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    1. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, 01-2013.
    2. C. Goodhart, 2001. "What Weight Should be Given to Asset Prices in the Measurementof Inflation?," DNB Staff Reports (discontinued), Netherlands Central Bank 65, Netherlands Central Bank.
    3. Braithwait, Steven D, 1980. "The Substitution Bias of the Laspeyres Price Index: An Analysis Using Estimated Cost-of-Living Indexes," American Economic Review, American Economic Association, American Economic Association, vol. 70(1), pages 64-77, March.
    4. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 111(472), pages F335-56, June.
    5. Robert A. Pollak, 1998. "The Consumer Price Index: A Research Agenda and Three Proposals," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(1), pages 69-78, Winter.
    6. William D. Nordhaus, 1998. "Quality Change in Price Indexes," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(1), pages 59-68, Winter.
    7. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, July.
    8. Brent R. Moulton & Karin E. Moses, 1997. "Addressing the Quality Change Issue in the Consumer Price Index," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 305-366.
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