Price measurement in the United States: A decade after the Boskin Report

Monthly Labor Review

Volumn 129, Issue 5, 2006, Pages 10-19

  Johnson, David S ^a   Reed, Stephen B ^b   Stewart, Kenneth J ^b  

^a U S CENSUS BUREAU   (United States)

^b BUREAU OF LABOR STATISTICS   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 33744795497     PISSN: 00981818     EISSN: 00981818     Source Type: Journal    
DOI: None     Document Type: Article

References (44)

1. Charles L. Schultze and Christopher Mackie, eds., At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes, Panel on Conceptual, Measurement, and Other Statistical Issues in Developing Cost-of-Living Indexes (Washington, National Academy Press, 2002).
2. "Chapter 17, The Consumer Price Index," BLS Handbook of Methods, updated online version (Bureau of Labor. Statistics, April 10, 2006), pp. 2-3;
3. available on the Internet at http://www.bls.gov/opub/hom/pdf/homch17.pdf.
4. For more information on the historical context of the COLI approach used in the CPI, see John S. Greenlees, "A Bureau of Labor Statistics Perspective on Bias in the Consumer Price Index," Federal Reserve Bank of St. Louis Review, May 1997, pp. 175-78.
5. For a detailed discussion of the conceptual foundations of price indexes, see Schultze and Mackie, eds., At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes, pp. 43-73. The CNSTAT report approves of a COLI approach, but does not explicitly recommend it to the exclusion of other approaches.
6. For a detailed history of the Consumer Price Index, see Marshall Reinsdorf and Jack E. Triplett, "A Review of Reviews: Ninety Years of Professional Thinking About the Consumer Price Index." Paper presented at the CRIW Conference on Price Index Concepts and Measurement, Vancouver, Canada, June 28-29, 2004.
7. For a discussion of the COLI and COGI debate, see Reinsdorf and Triplett, "A Review of Reviews," pp. 34-41.
8. Ibid.
9. See Brent R. Moulton, "Bias in the Consumer Price Index: What is the Evidence?" Journal of Economic Perspectives, Fall 1996.
10. The table is adopted from Moulton; ibid.
11. David E. Lebow and Jeremy D. Rudd, "Measurement Error in the Consumer Price Index: Where Do We Stand?" Journal of Economic Literature, March 2003, 159-201.
12. Charles R. Hulten, "Quality Change in the CPI," Federal Reserve Bank of St. Louis Review, May 2001, pp. 87-111.
13. See Robert Gordon, "Apparel Prices 1914-93 and the Hulten/Bruegel Paradox." Paper presented at CRIW Conference on Price Index Concepts and Measurement, Vancouver, Canada, 2004;
14. and Robert Gordon and Todd vanGoethem, "A Century of Housing Shelter Prices: Is There a Downward Bias in the CPI?" NBER Working Paper No. 11776 (National Bureau of Economic Research, November 2005).
15. Technically, the CPI is a Lowe price index, not a Laspeyres index. For more on this distinction, see Bert M. Balk and W. Erwin Diewert, "The Lowe Consumer Price Index and its Substitution Bias," Discussion Paper 04-07 (Department of Economics, University of British Columbia), July 2004. In general, the modified Laspeyres or Lowe index does not have the property of being an upper bound to a cost-of-living index. This follows because the comparisons of intermediate values of a Laspeyres index subsequent to the base period do not have this property.
16. See Ana M. Aizcorbe and Patrick C. Jackman, "The Commodity Substitution Effect in CPI Data, 1982-1991: Anatomy of a Price Change," Monthly Labor Review, December 1993, pp. 25-33.
17. See "Chapter 17, The Consumer Price Index," BLS Handbook of Methods, for item categories that use the Laspeyres formula.
18. Reinsdorf and Triplett suggest other reasons beyond substitution to use the geometric mean estimator.
19. For a detailed discussion of this index, see Robert Cage, John S. Greenlees, and Patrick Jackman, "Introducing the Chained Consumer Price Index." Paper presented at Seventh Meeting of the International Working Group on Price Indices, Paris, France, May 2003.
20. Unlike the CPI-U and CPI-U-XL, major group and other subaggregate C-CPI-U indexes are not independent. For example, the Food and Beverage C-CPI-U index reflects average price change among food and beverage items, but because relative price change for items in other major groups (Housing, Transportation, for example) may affect the level of expenditure on food items, the Food and Beverage C-CPI-U index is conditional upon price change in other major groups. Moreover, C-CPI-U indexes are not precisely consistent in aggregation, although in practice they are very close. That is, an expenditure weighted average of the subindexes may not yield the exact estimate of All Items price change as the official All Items index. Additionally, the difference between the C-CPI-U and published CPI-U is being used as a measure of upper-level substitution even though the published CPI-U is technically a Lowe index. Thus, while this table does give an idea of the relative magnitude of the substitution effects, it should be interpreted with caution for the major groups and other subaggregates. Note, however, that BLS research on upper-level substitution bias, which had preceded the development of the C-CPI-U and had been provided to the Boskin Commission, was based on the comparison of a true Laspeyres index with Fisher and Tornqvist superlative indexes.
21. The CPI-U-XL is an unofficial index that uses a Laspeyres formula to average the prices within basic item area cells, as well as aggregating those indexes.
22. Data from which this figure is derived are available on the BLS website at http://www.bls.gov/cpi/cpigmatab.htm.
23. See Ken Stewart, "Improving Sample Rotation Procedures," CPI Detailed Report, October 1994, pp. 7-8;
24. and "Extending the Improvements in CPI Sample Rotation Procedures and Improving the Procedures for Substitute Items," CPI Detailed Report, March, 1996, pp.4-5.
25. See Robert McClelland and Marshall Reinsdorf, "Small Sample Bias in Geometric Mean and Seasoned CPI Component Indexes," Bureau of Labor Statistics Working Paper 324, August 1999;
26. and Ralph Bradley, "Analytical Bias Reduction for Small Samples in the US Consumer Price Index," BLS unpublished manuscript, September 3, 2004.
27. See Bradley, "Analytical Bias Reduction for Small Samples in the US Consumer Price Index."
28. Robert Cage and coauthors estimate that the size of the differenceis only 0.6 percent if the biennial weights are used in the construction of the CPI-U. In addition, this large difference is also apparent in the difference between the PCE chain-weight and fixed-weight indexes for 2000.
29. Weights for the final version of the C-CPI-U are from contemporaneous expenditure data and so the CPI-U weights are always, in a sense, older than those of the C-CPI-U. However, since the CPI-U weights are updated every 2 years, the time gap between the weights of the two indexes varies over time.
30. For more on these discussions, see Schultze and Mackie, eds., At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes, p. 31.
31. See Robert Gordon, "Apparel Prices 1914-93 and the Hulten/Bruegel Paradox."
32. David E. Lebow and Jeremy D. Rudd, "Measurement Error in the Consumer Price Index: Where Do We Stand?" Journal of Economic Literature, March 2003, pp. 159-201.
33. Hulten, "Quality Change in the CPI."
34. Bart Hobijn, "On Both Sides of the Quality Bias in Price Indexes," Staff Report 157 (Federal Reserve Bank of New York, 2002);
35. on the Internet at http://ideas.repec.org/p/fip/fednsr/157.html#provider.
36. Bill Gtoss, "Haute Con Job," Investment Outlook (PIMCO Bonds, October 2004).
37. This is made especially clear in Brent R. Moulton, "Bias in the Consumer Price Index: What is the Evidence?"
38. and in John S. Gréenlees, "A Bureau of Labor Statistics Perspective on Bias in the Consumer Price Index."
39. This discussion follows that in the BLS Handbook of Methods.
40. See, Schultze and Mackie, eds., At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes, p. 122.
41. Kenneth J. Stewart and Stephen B. Reed, "Consumer Price Index Using Current Methods," Monthly Labor Review, June 1999, pp. 29-38.
42. In the past 3 years, the average adjustment has fallen to 0.26 percent per year.
43. David S. Johnson and Craig Brown, Internal BLS memorandum, April 2005.
44. David S. Johnson and Joe Chelena, Internal BLS memorandum, February 2005.