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Does the CPI Mirror Costs-of-Living? Engel's Law Suggests Not in Norway




There is considerable interest in identifying the magnitude of the difference between increases in CPI and costs-of-living, and this article uses the technique proposed by Hamilton (2001) to measure this discrepancy for Norway for the 90s. The method is extended along several dimensions by introducing a framework in which measurement errors are modelled. A non-parametric approach is then employed to segment households into demographic types while allowing for flexibility in costs-of-living increases for different standards. Hamilton finds that American CPI overstates costs-of-living in the U.S. for the period 1974-1991, Norwegian results for 1990-1999 indicate that CPI sometimes may understate costs-of-living, perhaps because of a credit-financed boom in house prices. The Norwegian CPI rose 22 percent in the period, but the general consumer behaved as if costs-of-living increased more than 35 percent. For some segments of society, for example single-person households, the increase was substantially larger, suggesting potentially important distributional effects.

Suggested Citation

  • Erling Røed Larsen, 2004. "Does the CPI Mirror Costs-of-Living? Engel's Law Suggests Not in Norway," Discussion Papers 368, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:368

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    Cited by:

    1. Timothy K.M. Beatty & Erling Røed Larsen & Dag Einar Sommervoll, 2005. "Measuring the Price of Housing Consumption for Owners in the CPI," Discussion Papers 427, Statistics Norway, Research Department.

    More about this item


    Almost-Ideal-Demand-System; consumer price index bias; cost-of-living; demand for food; Engel's Law; household behavior; house prices; inflation; real income; standards of living;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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