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Alternative strategies for aggregating prices in the CPI

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Author Info

  • Matthew D. Shapiro
  • David W. Wilcox

Abstract

The 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 Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1997)
Issue (Month): May ()
Pages: 113-125

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Handle: RePEc:fip:fedlrv:y:1997:i:may:p:113-125

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Related research

Keywords: Consumer price indexes ; Prices;

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References

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  1. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  2. 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, vol. 70(1), pages 64-77, March.
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Citations

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Cited by:
  1. Jan Hanousek & Randall K. Filer, 2003. "Substitution Biases in Price Indexes during Transition," Development and Comp Systems 0306002, EconWPA.
  2. Courtney, Mark, 2013. "Consumer price indices and the identification problem," MPRA Paper 54137, University Library of Munich, Germany.
  3. Lieu, Pang-Tien & Liang, Jung-Hui & Chen, Jui-Hui, 2008. "Consumer preferences and cost of living in Taiwan," Journal of Asian Economics, Elsevier, vol. 19(3), pages 224-235, June.
  4. Christos Ioannidis & Mick Silver, 2003. "Chained, exact and superlative hedonic price changes: estimates from microdata," Applied Economics, Taylor & Francis Journals, vol. 35(9), pages 1005-1014.
  5. Jan Hanousek & Randall K. Filer, 2001. "Evaluating Imperfections and Biases in Price Indexes during Transition," CERGE-EI Working Papers wp186, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  6. Robert J. Gordon, 2006. "The Boskin Commission Report: A Retrospective One Decade Later," International Productivity Monitor, Centre for the Study of Living Standards, vol. 12, pages 7-22, Spring.
  7. Robert J. Gordon, 2000. "The Boskin Commission Report and its Aftermath," NBER Working Papers 7759, National Bureau of Economic Research, Inc.
  8. Baclajanschi, Iaroslav & Bouton, Lawrence & Mori, Hideki & Ostojic, Dejan & Pushak, Taras & Tiongson, Erwin R., 2006. "The impact of energy price changes in Moldova," Policy Research Working Paper Series 3960, The World Bank.
  9. Petter Frenger, 2006. "The substitution bias of the consumer price index," Discussion Papers 451, Research Department of Statistics Norway.
  10. Charles Steindel, 1997. "Are there good alternatives to the CPI?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 3(Apr).
  11. David E. Lebow & Jeremy B. Rudd, 2006. "Inflation measurement," Finance and Economics Discussion Series 2006-43, Board of Governors of the Federal Reserve System (U.S.).
  12. Gregor W. Smith, 2009. "The Missing Links: Better Measures of Inflation and Inflation Expectations in Canada," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 287, April.
  13. John S. Greenlees & Elliot Williams, 2009. "Reconsideration of Weighting and Updating Procedures in the US CPI," Working Papers 431, U.S. Bureau of Labor Statistics.
  14. Jerry Hausman, 2002. "Sources of Bias and Solutions to Bias in the CPI," NBER Working Papers 9298, National Bureau of Economic Research, Inc.
  15. R. A. Somerville, 2004. "Changes in Relative Consumer Prices and the Substitution Bias of the Laspeyres Price Index - Ireland, 1985-2001," The Economic and Social Review, Economic and Social Studies, vol. 35(1), pages 55-82.

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