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A Survey of Measurement Biases in Price Indexes

  • Wynne, Mark A
  • Sigalla, Fiona D

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.

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Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

Volume (Year): 10 (1996)
Issue (Month): 1 (March)
Pages: 55-89

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Handle: RePEc:bla:jecsur:v:10:y:1996:i:1:p:55-89
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  1. George J. Stigler & James K. Kindahl, 1970. "The Behavior of Industrial Prices," NBER Books, National Bureau of Economic Research, Inc, number stig70-1, February.
  2. 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 359-71, July.
  3. 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.
  4. Manser, Marilyn E & McDonald, Richard J, 1988. "An Analysis of Substitution Bias in Measuring Inflation, 1959-85," Econometrica, Econometric Society, vol. 56(4), pages 909-30, July.
  5. 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 137-56, June.
  6. 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.
  7. Domberger, Simon, 1987. "Relative Price Variability and Inflation: A Disaggregated Analysis," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 547-66, June.
  8. Donald Siegel, 1991. "Errors in Output Deflators Revisited: Unit Values and the PPI," NBER Working Papers 3935, National Bureau of Economic Research, Inc.
  9. Pollak, Robert A., 1989. "The Theory of the Cost-of-Living Index," OUP Catalogue, Oxford University Press, number 9780195058703, December.
  10. 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.
  11. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
  12. 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 137-49, February.
  13. 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 1280-86, Nov.-Dec..
  14. 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, February.
  15. Tullock, Gordon, 1979. "When Is Inflation Not Inflation: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(2), pages 219-21, May.
  16. 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 121-74, June.
  17. R. Mark Rogers & Steven W. Henderson & Daniel H. Ginsburg, 1993. "Consumer prices: examining housing rental components," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 32-46.
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