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The consumer price index

Author

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  • Fiona Sigalla
  • Mark A. Wynne

Abstract

The consumer price index (CPI) is probably the most closely watched indicator of inflation in the U.S. economy. In this article, Mark Wynne and Fiona Sigalla explain the construction of the CPI and evaluate some of its potential shortcomings as a measure of inflation. Specifically, they examine the discrepancies that arise between the CPI and the true cost- of-living index as a result of improvements in the quality of goods, the introduction of new goods, substitution on the part of consumers between different goods and retail outlets, and the difficulty of measuring the prices actually paid by consumers for the goods they purchase. ; The authors review the literature that quantifies these discrepancies, with the objective of estimating the magnitude of the overall bias in the CPI. Wynne and Sigalla argue that, in fact, remarkably little is known about the extent or significance of the overall bias in the CPI. They conclude that biases in the CPI cause it to overstate inflation by no more than 1 percent a year, and probably less.

Suggested Citation

  • Fiona Sigalla & Mark A. Wynne, 1994. "The consumer price index," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 1-22.
    • Handle: RePEc:fip:fedder:y:1994:i:qii:p:1-22
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    File URL: https://www.dallasfed.org/~/media/documents/research/er/1994/er9402a.pdf
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    References listed on IDEAS

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    1. Zvi Griliches, 1992. "Output Measurement in the Service Sectors," NBER Books, National Bureau of Economic Research, Inc, number gril92-1, May.
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    Cited by:

    1. William J. Hawkes & Frank W. Piotrowski, 2003. "Using Scanner Data to Improve the Quality of Measurement in the Consumer Price Index," NBER Chapters, in: Scanner Data and Price Indexes, pages 17-38, National Bureau of Economic Research, Inc.
    2. Shiratsuka, Shigenori, 1999. "Measurement Errors in the Japanese Consumer Price Index," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 69-102, December.
    3. Kovács, Ilona, 2003. "A fogyasztói árindex torzító tényezői [Distorting factors in the consumer price index]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 702-719.
    4. Todd E. Clark, 1996. "U.S. inflation developments in 1995," Economic Review, Federal Reserve Bank of Kansas City, vol. 81(Q I), pages 27-42.
    5. Charles Steindel, 1997. "Are there good alternatives to the CPI?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 3(Apr).
    6. Jan Hanousek & Randall K. Filer, 2003. "Substitution Biases in Price Indexes during Transition," Development and Comp Systems 0306002, University Library of Munich, Germany.
    7. Paul A. Smith, 2021. "Estimating Sampling Errors in Consumer Price Indices," International Statistical Review, International Statistical Institute, vol. 89(3), pages 481-504, December.
    8. Jonathan Tuck & Shane Barratt & Stephen Boyd, 2021. "Portfolio Construction Using Stratified Models," Papers 2101.04113, arXiv.org, revised Feb 2021.
    9. Marshall B. Reinsdorf & Brent R. Moulton, 1996. "The Construction of Basic Components of Cost-of-Living Indexes," NBER Chapters, in: The Economics of New Goods, pages 397-436, National Bureau of Economic Research, Inc.
    10. 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.
    11. Michael J. Dueker & Andreas M. Fischer, 1997. "The FOMC in 1996: \\"watchful waiting\\"," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 7-23.
    12. 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 - Economics Institute, Prague.

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    Keywords

    Consumer price indexes; Prices;

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