IDEAS home Printed from https://ideas.repec.org/p/fip/feddwp/9340.html
   My bibliography  Save this paper

A survey of measurement biases in price indexes

Author

Listed:
  • Fiona Sigalla
  • Mark A. Wynne

Abstract

This paper reviews the literature on measurement error in the major US price indexes?the Consumer Price Index (CPI), the Producer Price Index (RPI), and the Gross Domestic Product (GDP) deflators. We take as our point of departure Triplett's, 1975, survey and focus on the studies of measurement error that have appeared since then. We review the problems of substitution bias, quality bias, new goods bias, and outlet substitution bias that are generally considered to be the main sources of error in price indexes. The bulk of the paper is devoted to problems in the CPI and PPI, as the GDP deflators tend to be based mainly on the components of these series. We find that there has been surprisingly little work on the problem of overall measurement error in any of these price indexes, and we conclude that there is very little scientific basis for the commonly accepted notion that measured inflation at 2 to 3 percent a year is consistent with price stability.

Suggested Citation

  • Fiona Sigalla & Mark A. Wynne, 1993. "A survey of measurement biases in price indexes," Working Papers 9340, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddwp:9340
    Note: Published as: Wynne, Mark A. and Fiona Sigalla (1996), "A Survey of Measurement Biases in Price Indexes," Journal of Economic Surveys 10 (1): 55-89.
    as

    Download full text from publisher

    File URL: https://www.dallasfed.org/~/media/documents/research/papers/1993/wp9340.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Daniel H. Ginsburg & Steven W. Henderson & R. Mark Rogers, 1993. "Consumer prices: examining housing rental components," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 32-46.
    2. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    3. Harry E. McAllister, 1961. "Statistical Factors Affecting the Stability of the Wholesale and Consumers' Price Indexes," NBER Chapters, in: The Price Statistics of the Federal Goverment, pages 373-418, National Bureau of Economic Research, Inc.
    4. Keith M. Carlson, 1989. "Do price indexes tell us about inflation? A review of the issue," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 12-30.
    5. Murray Foss & Marylin Manser & Allan Young, 1993. "Price Measurements and Their Uses," NBER Books, National Bureau of Economic Research, Inc, number foss93-1, March.
    6. Triplett, Jack E & McDonald, Richard J, 1977. "Assessing the Quality Error in Output Measures: The Case of Refrigerators," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 23(2), pages 137-156, June.
    7. Richard G. Davis, 1991. "Inflation: measurement and policy issues," Quarterly Review, Federal Reserve Bank of New York, vol. 16(Sum), pages 13-24.
    8. Blisard, William N. & Blaylock, James R., 1991. "Construction of true cost of food indexes from estimated Engel Curves," Technical Bulletins 312321, United States Department of Agriculture, Economic Research Service.
    9. Brian Motley, 1992. "Index numbers and the measurement of real GDP," Economic Review, Federal Reserve Bank of San Francisco, pages 3-13.
    10. Berndt, Ernst R & Griliches, Zvi & Rosett, Joshua G, 1993. "Auditing the Producer Price Index: Micro Evidence from Prescription Pharamceutical Preparations," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(3), pages 251-264, July.
    11. Milton Friedman & Anna J. Schwartz, 1982. "Monetary Trends in the United States and United Kingdom: Their Relation to Income, Prices, and Interest Rates, 1867–1975," NBER Books, National Bureau of Economic Research, Inc, number frie82-2, March.
    12. Randolph, William C, 1988. "Housing Depreciation and Aging Bias in the Consumer Price Index," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(3), pages 359-371, July.
    13. Robert J. Gordon, 1971. "Measurement Bias In Price Indexes For Capital Goods," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 17(2), pages 121-174, June.
    14. Noe, Nicholas N & von Furstenberg, George M, 1972. "The Upward Bias in the Consumer Price Index due to Substitution," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1280-1286, Nov.-Dec..
    15. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industrial Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1, March.
    16. Lichtenberg, Frank R & Griliches, Zvi, 1989. "Errors of Measurement in Output Deflators," Journal of Business & Economic Statistics, American Statistical Association, vol. 7(1), pages 1-9, January.
    17. W. Erwin Diewert, 1988. "The Early History of Price Index Research," NBER Working Papers 2713, National Bureau of Economic Research, Inc.
    18. Gordon, Robert J, 1971. "Measurement Bias in Price Indexes for Capital Goods," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 17(2), pages 121-174, June.
    19. Kokoski, Mary F, 1987. "Problems in the Measurement of Consumer Cost-of-Living Indexes," Journal of Business & Economic Statistics, American Statistical Association, vol. 5(1), pages 39-46, January.
    20. Fisher, Franklin M. & Shell, Karl, 1972. "The Economic Theory of Price Indices," Elsevier Monographs, Elsevier, edition 1, number 9780122577505 edited by Shell, Karl.
    21. Tullock, Gordon, 1979. "When Is Inflation Not Inflation: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(2), pages 219-221, May.
    22. Domberger, Simon, 1987. "Relative Price Variability and Inflation: A Disaggregated Analysis," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 547-566, June.
    23. Jack E. Triplett & Richard J. McDonald, 1977. "Assessing The Quality Error In Output Measures: The Case Of Refrigerators," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 23(2), pages 137-156, June.
    24. Paul R. Liegey, Jr, 1993. "Adjusting Apparel Indexes in the Consumer Price Index for Quality Differences," NBER Chapters, in: Price Measurements and Their Uses, National Bureau of Economic Research, Inc.
    25. Donald Siegel, 1991. "Errors in Output Deflators Revisited: Unit Values and the PPI," NBER Working Papers 3935, National Bureau of Economic Research, Inc.
    26. Zvi Griliches, 1992. "Output Measurement in the Service Sectors," NBER Books, National Bureau of Economic Research, Inc, number gril92-1, March.
    27. R. G. D. Allen, 1975. "Index Numbers in Theory and Practice," Palgrave Macmillan Books, Palgrave Macmillan, number 978-1-349-02312-7.
    28. Manser, Marilyn E & McDonald, Richard J, 1988. "An Analysis of Substitution Bias in Measuring Inflation, 1959-85," Econometrica, Econometric Society, vol. 56(4), pages 909-930, July.
    29. John Flueck, 1961. "A Study in Validity: BLS Wholesale Price Quotations," NBER Chapters, in: The Price Statistics of the Federal Goverment, pages 419-458, National Bureau of Economic Research, Inc.
    30. Reinsdorf, Marshall, 1994. "The Effect of Price Dispersion on Cost of Living Indexes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(1), pages 137-149, February.
    31. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, March.
    32. Alan S. Blinder, 1980. "The Consumer Price Index and the Measurement of Recent Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(2), pages 539-573.
    33. William Noel Blisard & James R. Blaylock, 1991. "Construction of True Cost of Food Indexes from Estimated Engel Curves," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 73(3), pages 775-783.
    34. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    35. Joseph F. Francois, 1989. "Estimating Homeownership Costs: Owners' Estimates of Implicit Rents and the Relative Importance of Rental Equivalence in the Consumer Price Index," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(1), pages 87-99, March.
    36. Pollak, Robert A., 1989. "The Theory of the Cost-of-Living Index," OUP Catalogue, Oxford University Press, number 9780195058703.
    37. Zvi Griliches, 1961. "Hedonic Price Indexes for Automobiles: An Econometric of Quality Change," NBER Chapters, in: The Price Statistics of the Federal Goverment, pages 173-196, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. James Gorry & Dean Scrimgeour, 2018. "Using Engel Curves To Estimate Consumer Price Index Bias For The Elderly," Contemporary Economic Policy, Western Economic Association International, vol. 36(3), pages 539-553, July.
    2. Mark A. Wynne & Diego Rodriguez‐Palenzuela, 2004. "Measurement Bias in the HICP: What do we know and What do we need to know?," Journal of Economic Surveys, Wiley Blackwell, vol. 18(1), pages 79-112, February.
    3. Hoffmann, Johannes, 1998. "Problems of inflation measurement in Germany," Discussion Paper Series 1: Economic Studies 1998,01e, Deutsche Bundesbank.
    4. Mark A. Wynne, 1995. "Sticky prices: what is the evidence?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 1-12.
    5. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The consumer price index as a measure of inflation," Economic Review, Federal Reserve Bank of Cleveland, vol. 29(Q IV), pages 15-24.
    6. Dimitri B. Papadimitriou & L. Randall Wray, "undated". "Targeting Inflation, The Effects of Monetary Policy on the CPI and Its Housing Component," Economics Public Policy Brief Archive ppb_27, Levy Economics Institute.
    7. Evan F. Koenig, 1994. "Capacity utilization and the evolution of manufacturing output: a closer look at the \"bounce-back effect.\"," Working Papers 9402, Federal Reserve Bank of Dallas.
    8. Freeman, Scott L. & Niefer, Mark J. & Roop, Joseph M., 1997. "Measuring industrial energy intensity: practical issues and problems," Energy Policy, Elsevier, vol. 25(7-9), pages 703-714.
    9. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
    10. George A. Kahn, 1994. "Achieving price stability: a 1993 report card," Economic Review, Federal Reserve Bank of Kansas City, vol. 79(Q I), pages 5-18.
    11. George A. Kahn, 1995. "Progress toward price stability: a report card for 1994," Economic Review, Federal Reserve Bank of Kansas City, vol. 80(Q I), pages 5-18.
    12. Todd E. Clark, 1996. "U.S. inflation developments in 1995," Economic Review, Federal Reserve Bank of Kansas City, vol. 81(Q I), pages 27-42.
    13. Todd E. Clark, 1999. "A comparison of the CPI and the PCE price index," Economic Review, Federal Reserve Bank of Kansas City, vol. 84(Q III), pages 15-29.
    14. Dimitri B. Papadimitriou & L. Randall Wray, 1996. "The Consumer Price Index As a Measure of Inflation," Economics Working Paper Archive wp_164, Levy Economics Institute.
    15. Timothy F. Bresnahan & Robert J. Gordon, 1996. "Introduction to "The Economics of New Goods"," NBER Chapters, in: The Economics of New Goods, pages 1-26, National Bureau of Economic Research, Inc.
    16. Inoue, Tetsuya, 1998. "Impact of Information Technology and Implications for Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(2), pages 29-60, December.
    17. Todd E. Clark, 1997. "U.S. inflation developments in 1996," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 11-30.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hoffmann, Johannes, 1998. "Problems of inflation measurement in Germany," Discussion Paper Series 1: Economic Studies 1998,01e, Deutsche Bundesbank.
    2. W. Erwin Diewert, 1995. "Price and Volume Measures in the System of National Accounts," NBER Working Papers 5103, National Bureau of Economic Research, Inc.
    3. Marshall Reinsdorf & Jack E. Triplett, 2009. "A Review of Reviews: Ninety Years of Professional Thinking About the Consumer Price Index," NBER Chapters, in: Price Index Concepts and Measurement, pages 17-83, National Bureau of Economic Research, Inc.
    4. Matthew D. Shapiro & David W. Wilcox, 1996. "Mismeasurement in the Consumer Price Index: An Evaluation," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 93-154, National Bureau of Economic Research, Inc.
    5. Shiratsuka, Shigenori, 1999. "Measurement Errors in the Japanese Consumer Price Index," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 69-102, December.
    6. David Wasshausen & Brent R. Moulton, 2006. "The Role of Hedonic Methods in Measuring Real GDP in the United States," BEA Papers 0067, Bureau of Economic Analysis.
    7. Erwin Diewert & John Greenlees & Charles R. Hulten, 2009. "Introduction: What Are the Issues?," NBER Chapters, in: Price Index Concepts and Measurement, pages 1-16, National Bureau of Economic Research, Inc.
    8. David Prentice & Xiangkang Yin, 2000. "Measuring Quality-Adjusted Inflation Rates for a Heterogeneous Oligopoly," Working Papers 2000.06, School of Economics, La Trobe University.
    9. Mark A. Wynne & Diego Rodriguez‐Palenzuela, 2004. "Measurement Bias in the HICP: What do we know and What do we need to know?," Journal of Economic Surveys, Wiley Blackwell, vol. 18(1), pages 79-112, February.
    10. G. Christian Ehemann & Brent R. Moulton, 2001. "Balancing the GDP Account," BEA Papers 0014, Bureau of Economic Analysis.
    11. Paul A. Armknecht & Daniel H. Ginsburg, 1992. "Improvements in Measuring Price Changes in Consumer Services: Past, Present, and Future," NBER Chapters, in: Output Measurement in the Service Sectors, pages 109-157, National Bureau of Economic Research, Inc.
    12. Ana Aizcorbe & Nicole Nestoriak, 2010. "Price Indexes for Drugs: A Review of the Issues," BEA Working Papers 0050, Bureau of Economic Analysis.
    13. 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.
    14. Charles R. Hulten, 2000. "Total Factor Productivity: A Short Biography," NBER Working Papers 7471, National Bureau of Economic Research, Inc.
    15. W. Diewert, 2011. "Measuring productivity in the public sector: some conceptual problems," Journal of Productivity Analysis, Springer, vol. 36(2), pages 177-191, October.
    16. Matthew D. Shapiro & David W. Wilcox, 1996. "Generating Non-Standard Multivariate Distributions with an Application to Mismeasurement in the CPI," NBER Technical Working Papers 0196, National Bureau of Economic Research, Inc.
    17. James Heckman, 2010. "Contributions of Zvi Griliches," NBER Chapters, in: Contributions in Memory of Zvi Griliches, pages 5-22, National Bureau of Economic Research, Inc.
    18. Białek Jacek, 2019. "Remarks on Geo-Logarithmic Price Indices," Journal of Official Statistics, Sciendo, vol. 35(2), pages 287-317, June.
    19. Hill, Robert J., 2006. "Superlative index numbers: not all of them are super," Journal of Econometrics, Elsevier, vol. 130(1), pages 25-43, January.
    20. Jerry Hausman, 2002. "Sources of Bias and Solutions to Bias in the CPI," NBER Working Papers 9298, National Bureau of Economic Research, Inc.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:feddwp:9340. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amy Chapman (email available below). General contact details of provider: https://edirc.repec.org/data/frbdaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.