Distributional aspects of the quality change bias in the CPI: Evidence from Spain

In this paper we address the issue of the distributional consequences of the quality change bias (QCB) in the CPI. In particular, we assess the conjecture raised by some critics of the Boskin commission report that new products and goods affected by quality effects are disproportionately consumed by the rich. Our analysis begins with the observation that the CPI is a weighted mean of household-specific statistical price indexes, with weights proportional to household total expenditures. Then, we suggest a simple but powerful procedure to evaluate the distributional consequences of eliminating the QCB by examining its impact on two scalars: (1) the CPI plutocratic bias, and (2) the change in money inequality after compensating every household for her individual inflation rate. The empirical analysis combines the detailed information pertaining the size of the QCB for the U.S. with household-specific price indexes for Spain in 1973-74, 1980-81, and 1990-91. The results show that, as conjectured, the quality bias especially affects the richer households.