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Sources of Bias and Solutions to Bias in the CPI

Author

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  • Jerry Hausman
Abstract
Four sources of bias in the Consumer Prices Index (CPI) have been identified. The most discussed is substitution bias, which creates a second order bias in the CPI. Three other changes besides prices changes create first order effects on a correctly measured cost of living index (COLI). (1) Introduction of new goods creates a first order effect of new good bias' (2) Quality changes in existing goods will lead to quality' bias, which has first order effects (3) Shifts in shopping patterns to lower priced stores can create first order outlet bias'. I explain in this paper that a pure price' based approach of surveying prices to estimate a COLI cannot succeed in solving the 3 problems of first order bias. Neither the BLS nor the recent report C. Schultze and C. Mackie, eds., At What Price (AWP, 2002), recognizes that to solve these problems, which have been long known, both quantity and price data are necessary. I discuss economic and econometric approaches to measuring the first order bias effects as well as the availability of scanner data that would permit implementation of the techniques. Lastly, I review recent research that demonstrates that these sources of bias are large in relation to measured inflation in the CPI.

Suggested Citation

  • Jerry Hausman, 2002. "Sources of Bias and Solutions to Bias in the CPI," NBER Working Papers 9298, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9298
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    References listed on IDEAS

    as
    1. Jerry Hausman & Gregory Leonard & J. Douglas Zona, 1994. "Competitive Analysis with Differentiated Products," Annals of Economics and Statistics, GENES, issue 34, pages 143-157.
    2. 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.
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    5. Timothy F. Bresnahan & Robert J. Gordon, 1996. "The Economics of New Goods," NBER Books, National Bureau of Economic Research, Inc, number bres96-1.
    6. 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.
    7. Hausman, Jerry A & Newey, Whitney K, 1995. "Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss," Econometrica, Econometric Society, vol. 63(6), pages 1445-1476, November.
    8. Amil Petrin, 2002. "Quantifying the Benefits of New Products: The Case of the Minivan," Journal of Political Economy, University of Chicago Press, vol. 110(4), pages 705-729, August.
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    15. Jerry A. Hausman, 1996. "Valuation of New Goods under Perfect and Imperfect Competition," NBER Chapters, in: The Economics of New Goods, pages 207-248, National Bureau of Economic Research, Inc.
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    20. Silver, Mick & Heravi, Saeed, 2001. "Scanner Data and the Measurement of Inflation," Economic Journal, Royal Economic Society, vol. 111(472), pages 383-404, June.
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    22. E. Rothbarth, 1941. "The Measurement of Changes in Real Income under Conditions of Rationing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 8(2), pages 100-107.
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    Cited by:

    1. Bank for International Settlements, 2010. "Monetary policy and the measurement of inflation: prices, wages and expectations," BIS Papers, Bank for International Settlements, number 49.
    2. Vivien Lewis, 2006. "Macroeconomic fluctuations and firm entry: theory and evidence," Computing in Economics and Finance 2006 112, Society for Computational Economics.
    3. Bakker, Gerben, 2004. "At the origins of increased productivity growth in services. Productivity, social savings and the consumer surplus of the film industry, 1900-1938," Economic History Working Papers 22348, London School of Economics and Political Science, Department of Economic History.
    4. Jane Lankes & Mary K. Shenk & Mary C. Towner & Nurul Alam, 2022. "Dowry Inflation: Perception or Reality?," Population Research and Policy Review, Springer;Southern Demographic Association (SDA), vol. 41(4), pages 1641-1672, August.
    5. Esat Daşdemir, 2022. "A New Proposal for Consumer Price Index (CPI) Calculation and Income Distribution Measurement by Income Groups," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 65(65), pages 395-414, June.

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    More about this item

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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