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Retrospective Price Indices and Substitution Bias

Author

Listed:
  • Diewert, Erwin
  • Huwiler, Marco
  • Kohli, Ulrich

Abstract

The consumer price index (CPI) is usually computed as a fixed-weighted Laspeyres price index, with the weights updated at discrete intervals only. It is well known that the Laspeyres functional form entails a substitution bias. One way to reduce it would be to use chained indices, and superlative ones if possible. Unfortunately, the necessary data are often missing. This paper proposes a simple method to retroactively compute the CPI once updated weights become available. The proposed index has the Fisher form. This makes it possible to assess the size of the substitution bias. An application to Swiss data is provided.

Suggested Citation

  • Diewert, Erwin & Huwiler, Marco & Kohli, Ulrich, 2009. "Retrospective Price Indices and Substitution Bias," Economics working papers erwin_diewert-2009-4, Vancouver School of Economics, revised 20 Jan 2009.
    • Handle: RePEc:ubc:bricol:erwin_diewert-2009-4
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    File URL: http://www.econ.ubc.ca/diewert/dp0901.pdf
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    Cited by:

    1. W. Erwin Diewert & Kevin J. Fox, 2022. "Measuring real consumption and consumer price index bias under lockdown conditions," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(S1), pages 480-502, February.
    2. Rahel Braun & Sarah M. Lein, 2021. "Sources of Bias in Inflation Rates and Implications for Inflation Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1553-1572, September.
    3. Ludwig von Auer & Alena Shumskikh, 2020. "Substitution Bias in the Measurement of Import and Export Price Indices: Causes and Correction," Research Papers in Economics 2020-10, University of Trier, Department of Economics.
    4. Santiago E. Alvarez & Sarah M. Lein, 2020. "Tracking inflation on a daily basis," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 156(1), pages 1-13, December.
    5. Ludwig von Auer & Alena Shumskikh, 2024. "Retrospective Computations of Price Index Numbers: Theory and Application," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 70(1), pages 60-79, March.
    6. Robert J. Hill & Alice O. Nakamura, 2010. "Improving Inflation And Related Performance Measures For Nations: An Introduction," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(s1), pages 1-10, June.
    7. W. Erwin Diewert & Kevin J. Fox, 2020. "Measuring Real Consumption and CPI Bias under Lockdown Conditions," NBER Working Papers 27144, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

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    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

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