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Alternative Strategies for Aggregating Prices in the CPI

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Author Info
Matthew D. Shapiro
David W. Wilcox

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5980.

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Date of creation: Apr 1999
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Handle: RePEc:nbr:nberwo:5980

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Find related papers by JEL classification:
C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Robert J. Gordon, 2000. "The Boskin Commission Report and its Aftermath," NBER Working Papers 7759, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Jan Hanousek & Randall K. Filer, 2003. "Substitution Biases in Price Indexes during Transition," Development and Comp Systems 0306002, EconWPA. [Downloadable!]
  3. 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. [Downloadable!]
  4. Petter Frenger, 2006. "The substitution bias of the consumer price index," Discussion Papers 451, Research Department of Statistics Norway. [Downloadable!]
  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. [Downloadable!]
  6. 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. [Downloadable!]
  7. 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. [Downloadable!]
    Other versions:
  8. Christos Ioannidis & Mick Silver, 2003. "Chained, exact and superlative hedonic price changes: estimates from microdata," Applied Economics, Taylor and Francis Journals, vol. 35(9), pages 1005-1014, January. [Downloadable!] (restricted)
  9. 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.). [Downloadable!]
  10. Charles Steindel, 1997. "Are there good alternatives to the CPI?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue Apr. [Downloadable!]
  11. Vincenzo Atella, 2002. "The Relationship Between Health Policies, Medical Technology Trend, And Outcomes: A Perspective From The Tech Global Research Network," Departmental Working Papers 181, Tor Vergata University, CEIS. [Downloadable!]
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