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Measurement Error in the Consumer Price Index: Where Do We Stand?

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  • David E. Lebow
  • Jeremy B. Rudd

Abstract

We survey the evidence on CPI bias and provide our best estimate of its magnitude. We also identify a "weighting" bias that has not been quantified previously. We estimate that the CPI currently overstates the rate of change in the cost of living by about 0.9 percentage point per year, with a confidence interval ranging from 0.3 to 1.4 percentage points. Our estimate is boosted by new evidence that substitution bias has increased sharply since the mid-1990s, and is reduced by the cumulative impact of a variety of recent improvements to BLS procedures. The study discusses potential areas for further improvement.

Suggested Citation

  • David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
  • Handle: RePEc:aea:jeclit:v:41:y:2003:i:1:p:159-201
    Note: DOI: 10.1257/002205103321544729
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    References listed on IDEAS

    as
    1. Robert A. Pollak, 1998. "The Consumer Price Index: A Research Agenda and Three Proposals," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 69-78, Winter.
    2. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    3. 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.
    4. Crone, Theodore M. & Nakamura, Leonard I. & Voith, Richard, 1998. "Measuring housing services inflation," Working Papers 98-21, Federal Reserve Bank of Philadelphia, revised 01 Jan 1999.
    5. repec:bin:bpeajo:v:27:y:1996:i:1996-3:p:201-267 is not listed on IDEAS
    6. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1.
    7. repec:bin:bpeajo:v:27:y:1996:i:1996-3:p:133-199 is not listed on IDEAS
    8. William D. Nordhaus, 1998. "Quality Change in Price Indexes," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 59-68, Winter.
    9. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages 335-356, June.
    10. C. Goodhart, 2001. "What Weight Should be Given to Asset Prices in the Measurementof Inflation?," DNB Staff Reports (discontinued) 65, Netherlands Central Bank.
    11. 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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