IDEAS home Printed from https://ideas.repec.org/p/ime/imedps/24-e-16.html

Measurement Errors in the Consumer Price Index: Perspectives on Numerical Targets for Price Stability in Major Economies

Author

Listed:
  • Satoshi Kobayashi

    (Director and Senior Economist, Institute for Monetary and Economic Studies (IMES), Bank of Japan (BOJ) (E-mail: satoshi.kobayashi@boj.or.jp))

  • Takeshi Shinohara

    (Deputy Director and Economist, International Department, BOJ (takeshi.shinohara@boj.or.jp))

  • Shigenori Shiratsuka

    (Professor, Faculty of Economics, Keio University (E-mail: shigenori.shiratsuka@keio.jp))

  • Nao Sudo

    (Deputy Director-General, Financial System and Bank Examination Department, BOJ (E-mail: nao.sudou@boj.or.jp))

  • Itofumi Takeuchi

    (Economist, IMES, BOJ (E-mail: itofumi.takeuchi@boj.or.jp))

Abstract

The consumer price index (CPI) is widely used by major central banks in the definition of a numerical target for price stability. In this context, the measurement errors, which became a significant concern following the U.S. Boskin Report in 1996, are still occasionally cited as one of the justifications for setting a positive inflation rate target. This paper presents a review of the current status of discussions and studies on measurement errors in major economies, including Japan, with a particular focus on those published since the Boskin Report. In light of the accumulated research to date, the implementation of solutions to enhance index accuracy in each country, and changes in economic structure, the magnitude of measurement errors that were pointed out in the report appears to have decreased overall, although there are differences across countries and types of errors. Nevertheless, certain areas, particularly those pertaining to service prices, continue to present challenges, and in consideration of the potential impact of changing economic structures, such as e-commerce, measurement errors may fluctuate significantly and remain unresolved in the transition towards a future increase in service consumption, a more digitalized economy, and an aging population. Given these issues, measurement errors could remain a valid basis for setting numerical targets for the CPI.

Suggested Citation

  • Satoshi Kobayashi & Takeshi Shinohara & Shigenori Shiratsuka & Nao Sudo & Itofumi Takeuchi, 2024. "Measurement Errors in the Consumer Price Index: Perspectives on Numerical Targets for Price Stability in Major Economies," IMES Discussion Paper Series 24-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:24-e-16
    as

    Download full text from publisher

    File URL: https://www.imes.boj.or.jp/research/papers/english/24-E-16.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    2. Bradley, Ralph, 2013. "Feasible methods to estimate disease based price indexes," Journal of Health Economics, Elsevier, vol. 32(3), pages 504-514.
    3. repec:ucp:bknber:9780226304557 is not listed on IDEAS
    4. Marshall Reinsdorf, 1993. "The Effect of Outlet Price Differentials on the US Consumer Price Index," NBER Chapters, in: Price Measurements and Their Uses, pages 227-258, National Bureau of Economic Research, Inc.
    5. Matthew D. Shapiro & David W. Wilcox, 1996. "Mismeasurement in the Consumer Price Index: An Evaluation," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 93-154, National Bureau of Economic Research, Inc.
    6. Sato, Kazuo, 1974. "Ideal Index Numbers that Almost Satisfy the Factor Reversal Text," The Review of Economics and Statistics, MIT Press, vol. 56(4), pages 549-552, November.
    7. Eric Maskin & John Riley, 1984. "Monopoly with Incomplete Information," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 171-196, Summer.
    8. Wataru Takahashi & Kenichiro Watanabe & Hiroshi Fujiki, 2007. "The Fourteenth International Conference "Growth, Integration and Monetary Policy in East Asia," Introduction Summary," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(S1), pages 1-8, December.
    9. David E. Lebow & Jeremy B. Rudd, 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand?," Journal of Economic Literature, American Economic Association, vol. 41(1), pages 159-201, March.
    10. Robert J. Gordon, 1990. "The Measurement of Durable Goods Prices," NBER Books, National Bureau of Economic Research, Inc, number gord90-1, January.
    11. Kelvin J. Lancaster, 1966. "A New Approach to Consumer Theory," Journal of Political Economy, University of Chicago Press, vol. 74(2), pages 132-132.
    12. Austan D. Goolsbee & Peter J. Klenow, 2018. "Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce," AEA Papers and Proceedings, American Economic Association, vol. 108, pages 488-492, May.
    13. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May.
    14. Theodore M. Crone & Leonard I. Nakamura & Richard Voith, 2010. "Rents Have Been Rising, Not Falling, in the Postwar Period," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 628-642, August.
    15. Hausman, Jerry, 1999. "Cellular Telephone, New Products, and the CPI," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 188-194, April.
    16. Carol Corrado & Jonathan Haskel & Javier Miranda & Daniel Sichel, 2021. "Measuring and Accounting for Innovation in the Twenty-First Century," NBER Books, National Bureau of Economic Research, Inc, number corr-2, January.
    17. Corrado, Carol & Haskel, Jonathan & Miranda, Javier & Sichel, Daniel (ed.), 2021. "Measuring and Accounting for Innovation in the Twenty-First Century," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226728179, August.
    18. Angus Deaton, 1998. "Getting Prices Right: What Should Be Done?," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 37-46, Winter.
    19. Ernst R. Berndt & Charles R. Hulten, 2007. "Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches," NBER Books, National Bureau of Economic Research, Inc, number bern07-1, January.
    20. Katharine G. Abraham & John S. Greenlees & Brent R. Moulton, 1998. "Working to Improve the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 27-36, Winter.
    21. Austan D. Goolsbee & Peter J. Klenow, 2018. "Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce," NBER Working Papers 24649, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Marshall Reinsdorf & Jack E. Triplett, 2009. "A Review of Reviews: Ninety Years of Professional Thinking About the Consumer Price Index," NBER Chapters, in: Price Index Concepts and Measurement, pages 17-83, National Bureau of Economic Research, Inc.
    2. Ambrose, Brent W. & Coulson, N. Edward & Yoshida, Jiro, 2017. "Inflation Rates Are Very Different When Housing Rents Are Accurately Measured," HIT-REFINED Working Paper Series 71, Institute of Economic Research, Hitotsubashi University.
    3. 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.
    4. Bajari, P. & Cen, Z. & Chernozhukov, V. & Manukonda, M. & Vijaykumar, S. & Wang, J. & Huerta, R. & Li, J. & Leng, L. & Monokroussos, G. & Wang, S., 2025. "Hedonic prices and quality adjusted price indices powered by AI," Journal of Econometrics, Elsevier, vol. 251(C).
    5. Hoffmann, Johannes, 1998. "Problems of inflation measurement in Germany," Discussion Paper Series 1: Economic Studies 1998,01e, Deutsche Bundesbank.
    6. Gian Maria Tomat, 2005. "Prices, Product Differentiation And Quality Measurement: A Comparison Between Hedonic And Matched Model Methods," Temi di discussione (Economic working papers) 547, Bank of Italy, Economic Research and International Relations Area.
    7. Robert J. Gordon, 2000. "The Boskin Commission Report and its Aftermath," NBER Working Papers 7759, National Bureau of Economic Research, Inc.
    8. Gordon, Robert-J, 1999. "The Boskin Commission Report and Its Aftermath," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 41-68, December.
    9. Jakub Rybacki & Tamara Bińczak & Filip Kaczmarek, 2018. "Is HICP really harmonized? Problems with quality adjustments and new products," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 53, pages 97-116.
    10. Erica L. Groshen & Brian C. Moyer & Ana M. Aizcorbe & Ralph Bradley & David M. Friedman, 2017. "How Government Statistics Adjust for Potential Biases from Quality Change and New Goods in an Age of Digital Technologies: A View from the Trenches," Journal of Economic Perspectives, American Economic Association, vol. 31(2), pages 187-210, Spring.
    11. repec:upd:utmpwp:033 is not listed on IDEAS
    12. David M. Byrne & John G. Fernald & Marshall B. Reinsdorf, 2016. "Does the United States Have a Productivity Slowdown or a Measurement Problem?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(1 (Spring), pages 109-182.
    13. Kenn Ariga & Kenji Matsui, 2003. "Mismeasurement of the CPI," NBER Chapters, in: Structural Impediments to Growth in Japan, pages 89-154, National Bureau of Economic Research, Inc.
    14. 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.
    15. David Prentice & Xiangkang Yin, 2000. "Measuring Quality-Adjusted Inflation Rates for a Heterogeneous Oligopoly," Working Papers 2000.06, School of Economics, La Trobe University.
    16. Matthew D. Shapiro & David W. Wilcox, 1996. "Generating Non-Standard Multivariate Distributions with an Application to Mismeasurement in the CPI," NBER Technical Working Papers 0196, National Bureau of Economic Research, Inc.
    17. Christos Ioannidis & Mick Silver, 1999. "Estimating exact hedonic indexes: An application to UK television sets," Journal of Economics, Springer, vol. 69(1), pages 71-94, February.
    18. Jan van Dalen & Ben Bode, 2004. "Quality-corrected price indices: the case of the Dutch new passenger car market, 1990-1999," Applied Economics, Taylor & Francis Journals, vol. 36(11), pages 1169-1197.
    19. Doms, Mark & Forman, Chris, 2005. "Prices for local area network equipment," Information Economics and Policy, Elsevier, vol. 17(3), pages 365-388, July.
    20. Christos Ioannidis & Mick Silver, 2003. "Chained, exact and superlative hedonic price changes: estimates from microdata," Applied Economics, Taylor & Francis Journals, vol. 35(9), pages 1005-1014.
    21. Mick Silver & Saeed Heravi, 2003. "The Measurement of Quality-Adjusted Price Changes," NBER Chapters, in: Scanner Data and Price Indexes, pages 277-316, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ime:imedps:24-e-16. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kinken (email available below). General contact details of provider: https://edirc.repec.org/data/imegvjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.