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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

Paper provided by European Central Bank in its series Working Paper Series with number 0144.

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Date of creation: May 2002
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Handle: RePEc:ecb:ecbwps:20020144

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Keywords: Cost of living indices; Superlative index numbers;

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  1. 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.
  2. 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.
  3. Zvi Griliches, 1988. "Hedonic Price Indexes and the Measurement of Capital and Productivity: Some Historical Reflections," NBER Working Papers 2634, National Bureau of Economic Research, Inc.
  4. 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.
  5. Chen, Yi Vivian & Heston, Alan & Lipsey, Robert, 2000. "International and interarea comparisons of income, output and prices," Journal of Asian Economics, Elsevier, vol. 11(3), pages 363-364, December.
  6. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1, May.
  7. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557, янваÑ.
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Cited by:
  1. Diewert, Erwin, 2007. "Index Numbers," Economics working papers diewert-07-01-03-08-17-23, Vancouver School of Economics, revised 31 Jan 2007.
  2. Erwin Diewert & Saeed Heravi & Mick Silver, 2008. "Hedonic Imputation versus Time Dummy Hedonic Indexes," NBER Working Papers 14018, 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. "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.
  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. John W. Galbraith & Greg Tkacz, 2007. "Electronic Transactions as High-Frequency Indicators of Economic Activity," Working Papers 07-58, Bank of Canada.

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