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How Much Does Formula vs. Chaining Matter for a Cost-of-Living Index? The CPI-U vs. the C-CPI-U

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  • Gregory Kurtzon

Abstract

A large economics literature has debated the best formula to estimate a cost-of-living index (COLI) - this study shows that formula may not be relevant for many purposes for an index chained at a monthly frequency if current weight information is properly used. The large majority of the difference between the levels of the CPI-U and the generally lower C-CPI- U (a COLI) is due to the CPI-U weights holding quantities constant over long periods, rather than the difference in formula assumptions. A new method to avoid chain drift with long term price relatives is developed to effectively approximate a COLI.

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  • Gregory Kurtzon, 2017. "How Much Does Formula vs. Chaining Matter for a Cost-of-Living Index? The CPI-U vs. the C-CPI-U," Economic Working Papers 498, Bureau of Labor Statistics.
    • Handle: RePEc:bls:wpaper:498
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