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The Cost of Living with the RPI: Substitution Bias in the UK Retail Prices Index

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  • Blow, Laura
  • Crawford, Ian

Abstract

This paper uses revealed preference restrictions and nonparametric statistical methods to bound the true cost-of-living index which corresponds most closely to the UK Retail Prices Index (RPI). This is used to assess the RPI formula for substitution bias. We show that neither the direction nor the existence of bias in the RPI formula can be established on a priori theoretical grounds. However, we find empirical evidence of a variable, but generally positive bias in the rate of inflation recorded by the RPI formula.

Suggested Citation

  • Blow, Laura & Crawford, Ian, 2001. "The Cost of Living with the RPI: Substitution Bias in the UK Retail Prices Index," Economic Journal, Royal Economic Society, vol. 111(472), pages 357-382, June.
  • Handle: RePEc:ecj:econjl:v:111:y:2001:i:472:p:f357-82
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    Citations

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    Cited by:

    1. Lieu, Pang-Tien & Liang, Jung-Hui & Chen, Jui-Hui, 2008. "Consumer preferences and cost of living in Taiwan," Journal of Asian Economics, Elsevier, vol. 19(3), pages 224-235, June.
    2. repec:spr:empeco:v:52:y:2017:i:4:d:10.1007_s00181-016-1122-4 is not listed on IDEAS
    3. David E. Lebow & Jeremy B. Rudd, 2001. "Measurement error in the consumer price index: where do we stand?," Finance and Economics Discussion Series 2001-61, Board of Governors of the Federal Reserve System (U.S.).
    4. Unayama, Takashi, 2004. "Upward bias in the consumer price index under the zero-inflation economy," Economics Letters, Elsevier, vol. 85(1), pages 139-144, October.
    5. 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.
    6. Cinzia Rienzo, 2017. "Real wages, wage inequality and the regional cost-of-living in the UK," Empirical Economics, Springer, vol. 52(4), pages 1309-1335, June.
    7. Rodrigo Lluberas, 2013. "Life-cycle expenditure and retirees’ cost of living," Documentos de trabajo 2013007, Banco Central del Uruguay.

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