Measurement Error in the Consumer Price Index: Where Do We Stand?
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.
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Volume (Year): 41 (2003)
Issue (Month): 1 (March)
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- 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.
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- William D. Nordhaus, 1998. "Quality Change in Price Indexes," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 59-68, Winter.
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- C. Goodhart, 2001. "What Weight Should be Given to Asset Prices in the Measurementof Inflation?," DNB Staff Reports (discontinued) 65, Netherlands Central Bank.
- 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. Full references (including those not matched with items on IDEAS)
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