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Measurement error in the consumer price index: where do we stand?

  • David E. Lebow
  • Jeremy B. Rudd
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    We survey the evidence bearing on measurement error in the CPI and provide our best estimate of the magnitude of CPI bias. We also identify a "weighting" bias in the CPI that has not been previously discussed in the literature. In total, we estimate that the CPI overstates the change in the cost of living by about 0.6 percentage point per year, with a confidence interval that ranges from 0.1 to 1.2 percentage points. Roughly half of this bias is accounted for by the CPI's inability to fully capture the welfare improvement from quality change and the introduction of new items. Our bias estimate is smaller than that found in several earlier studies, in part because the BLS has recently made a variety of improvements to its procedures; our study highlights several potential areas for further improvement.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-61.

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    Date of creation: 2001
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    Handle: RePEc:fip:fedgfe:2001-61
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    1. David H. Good & Robin C. Sickles & Jesse C. Weiher, 2008. "A Hedonic Price Index For Airline Travel," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(3), pages 438-465, 09.
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    4. Theodore M. Crone & Leonard I. Nakamura & Richard Voith, 1999. "Measuring housing services inflation," Working Papers 99-9, Federal Reserve Bank of Philadelphia.
    5. David M. Cutler & Mark McClellan & Joseph P. Newhouse & Dahlia Remler, 1999. "Pricing Heart Attack Treatments," NBER Working Papers 7089, National Bureau of Economic Research, Inc.
      • David M. Cutler & Mark B. McClellan & Joseph P. Newhouse & Dahlia K. Remler, 2001. "Pricing Heart Attack Treatments," NBER Chapters, in: Medical Care Output and Productivity, pages 305-362 National Bureau of Economic Research, Inc.
    6. Iain M. Cockburn & Aslam H. Anis, 1998. "Hedonic Analysis of Arthritis Drugs," NBER Working Papers 6574, National Bureau of Economic Research, Inc.
    7. Robert C. Feenstra & Matthew D. Shapiro, 2003. "High-Frequency Substitution and the Measurement of Price Indexes," NBER Chapters, in: Scanner Data and Price Indexes, pages 123-150 National Bureau of Economic Research, Inc.
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    11. repec:cup:cbooks:9780521296762 is not listed on IDEAS
    12. Ernst R. Berndt & David M. Cutler & Richard G. Frank & Zvi Griliches & Joseph P. Newhouse & Jack E. Triplett, 1998. "Price Indexes for Medical Care Goods and Services: An Overview of Measurement Issues," Harvard Institute of Economic Research Working Papers 1851, Harvard - Institute of Economic Research.
    13. Gordon, Robert J., 1990. "The Measurement of Durable Goods Prices," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226304557.
    14. Hausman, Jerry, 1999. "Cellular Telephone, New Products, and the CPI," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 188-94, April.
    15. Robert J. Gordon, 2000. "The Boskin Commission Report and its Aftermath," NBER Working Papers 7759, National Bureau of Economic Research, Inc.
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