Alternative strategies for aggregating prices in the CPI
AbstractThe Consumer Price Index does not take into account the fact that consumers alter the composition of their purchases in response to changes in relative prices. This substitution effect will cause the CPI to grow faster than the cost of living. This paper presents new estimates showing that this bias in the CPI averaged 0.3 percentage points per year between December 1986 and December 1995. This bias could be eliminated by using a superlative index to aggregate prices across the item-area strata of the CPI. The paper discusses the practical difficulties in implementing such a calculation and suggests a method for overcoming them. In particular, it shows how to construct an accurate approximation to a superlative price index that can be published with the same timeliness as the CPI.
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Bibliographic InfoArticle provided by Federal Reserve Bank of St. Louis in its journal Review.
Volume (Year): (1997)
Issue (Month): May ()
Other versions of this item:
- Matthew D. Shapiro & David W. Wilcox, 1999. "Alternative Strategies for Aggregating Prices in the CPI," NBER Working Papers 5980, National Bureau of Economic Research, Inc.
- C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
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