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A Failure in the Measurement of Inflation: Results From a Hedonic and Matched Experiment Using Scanner Data

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  • Silver, Mick
  • Heravi, Saeed

Abstract

Statistical offices use the matched models method to compile consumer price indices (CPIs) to measure inflation. The prices of a sample of models are recorded, and then price collectors visit the same stores each subsequent month to record the prices of the same matched sample of models. The matched models method is designed to control for quality changes. But new, unmatched models launched in subsequent months have their prices ignored as do old unmatched models no longer available. The paper uses retailer's bar-code scanner data on several consumer durables to show that serious sample degradation can take place and that the quality-adjusted prices of unmatched items differ from those of matched ones, leading to substantial underestimates of inflation. Hedonic indices use the whole sample. They are argued to be more useful to price measurement in markets with a rapid turnover of models in order to avoid the demonstrated bias. JEL Classification: C43, E43, O47

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 23 (2005)
Issue (Month): (July)
Pages: 269-281

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Handle: RePEc:bes:jnlbes:v:23:y:2005:p:269-281

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  1. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1, May.
  2. Alan Heston & Robert E. Lipsey, 1999. "International and Interarea Comparisons of Income, Output, and Prices," NBER Books, National Bureau of Economic Research, Inc, number hest99-1, May.
  3. Katharine G. Abraham & John S. Greenlees & Brent R. Moulton, 1998. "Working to Improve the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 27-36, Winter.
  4. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557.
  5. Zvi Griliches, 1991. "Hedonic Price Indexes and the Measurement of Capital and Productivity: Some Historical Reflections," NBER Chapters, in: Fifty Years of Economic Measurement: The Jubilee of the Conference on Research in Income and Wealth, pages 185-206 National Bureau of Economic Research, Inc.
  6. Alastair Cunningham, 1996. "Measurement Bias in Price Indices: An Application to the UK's RPI," Bank of England working papers 47, Bank of England.
  7. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter.
  8. Paul A. Armknecht & Fenella Maitland-Smith, 1999. "Price Imputation and Other Techniques for Dealing with Missing Observations, Seasonality and Quality Change in Price Indices," IMF Working Papers 99/78, International Monetary Fund.
  9. Mary F. Kokoski & Brent R. Moulton & Kimberly D. Zieschang, 1999. "Interarea Price Comparisons for Heterogeneous Goods and Several Levels of Commodity Aggregation," NBER Chapters, in: International and Interarea Comparisons of Income, Output, and Prices, pages 123-169 National Bureau of Economic Research, Inc.
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Cited by:
  1. John W. Galbraith & Greg Tkacz, 2007. "Electronic Transactions as High-Frequency Indicators of Economic Activity," Working Papers 07-58, Bank of Canada.
  2. W. Erwin Diewert & Saeed Heravi & Mick Silver, 2009. "Hedonic Imputation versus Time Dummy Hedonic Indexes," NBER Chapters, in: Price Index Concepts and Measurement, pages 161-196 National Bureau of Economic Research, Inc.
  3. de Haan, Jan & van der Grient, Heymerik A., 2011. "Eliminating chain drift in price indexes based on scanner data," Journal of Econometrics, Elsevier, vol. 161(1), pages 36-46, March.
  4. Diewert, Erwin, 2007. "Index Numbers," Economics working papers diewert-07-01-03-08-17-23, Vancouver School of Economics, revised 31 Jan 2007.
  5. Mick Silver, 2009. "The Hedonic Country Product Dummy Method and Quality Adjustments for Purchasing Power Parity Calculations," IMF Working Papers 09/271, International Monetary Fund.
  6. Diewert, Erwin, 2007. "The Paris OECD-IMF Workshop on Real Estate Price Indexes: Conclusions and Future Directions," Economics working papers diewert-07-01-03-08-12-12, Vancouver School of Economics, revised 31 Jan 2007.

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