Executive Summary
Recommendation i
The BLS should establish a cost of living index (COLI) as its objective in
measuring consumer prices.
The BLS has no fundamental disagreement with the commission about what the objective of
the CPI should be, though we would emphasize that it is important to be clear about what
precisely one means by a cost-of-living index. We will continue to exercise our judgment
on the appropriateness of taking any specific step designed to bring the CPI closer to a
true cost-of-living index, bearing in mind that it is crucial that any official statistic
be based on rigorous, objective methods.
Recommendations ii, iii, and iv
The BLS should develop and publish two indexes: one published monthly and one
published and updated annually and revised historically.
The timely, monthly index should continue to be called the CPI and should move
toward a COLI concept by adopting a "superlative" index formula to account for
change market baskets, abandoning the pretense of sustaining the fixed-weight Laspeyres
formula.
The new annual COL index would use a compatible "superlative-index"
formula and reflect subsequent data, updated weights, and the introduction of new goods
(with their history extended backward).
The BLS does not accept the specifics of these recommendations but has initiatives
underway to address upper-level substitution bias and the currency of the CPI market
basket. Further research is needed to determine whether experimental techniques that
approximate a superlative index would yield a more accurate monthly measure. We believe
that hasty implementation of such techniques in the production of the monthly CPI without
more complete testing would damage the credibility of our statistical system. The BLS has
requested funds to support publication of a superlative index as a complement to the CPI
beginning in 2002. Additionally, the BLS has requested funds to expand the Consumer
Expenditure Survey sample size and develop enhanced computer systems to support the timely
introduction of more current spending data when the index weights are next updated.
Finally, the BLS will announce a decision to make more frequent updates to expenditure
weights in the near future.
Recommendation v
The BLS should change its procedure for combining price quotations by moving to
geometric means at the elementary aggregates level.
The geometric mean formula for aggregating price quotations has been under
investigation by the BLS over the past several years. On April 17, 1998 the BLS announced
that the geometric mean formula will be used in the CPI in place of the current Laspeyres
formula in all item strata except for selected shelter services, selected utilities and
government charges and selected medical services. This change will be implemented with the
CPI release for January 1999. Our best estimate is that the planned use of the geometric
mean formula will lower the growth rate of the CPI by approximately 0.2 percentage point
per year. A discussion of the decision and the rationale for the adoption of the geometric
mean formula is presented in the paper entitled "Planned Change in the Consumer Price
Index Formula" which is appended to this document.
Additional recommendation regarding expanded use of hedonic regressions for
making quality adjustments.
The BLS agrees with the commission that the use of hedonic regression techniques in
quality adjustment should be expanded. The BLS has used hedonic quality adjustment for
selected CPI components for several years, has recently extended its use to additional
components, and has requested funds for continued expansion.
Recommendation vi
The BLS should study the behavior of the individual components of the index to
ascertain which components provide most information on the future longer-term movements in
the index and which items have fluctuations which are largely unrelated to the total and
emphasize the former in its data collection activities.
The BLS believes that this proposed redirection of data collection efforts would be
inconsistent with the primary objective of the CPI–to approximate changes in the cost
of living. BLS thus does not plan to implement this recommendation.
Recommendation vii
The BLS should change the CPI sampling procedures to de-emphasize geography,
starting first with sampling the universe of commodities to be priced and then deciding,
commodity by commodity, what is the most efficient way to collect a representative sample
of prices from which outlets, and only later turn to geographically clustered samples for
the economy of data collection.
The BLS has no specific plans to implement changes to sampling procedures in connection
with this recommendation. It is the current BLS practice to decide, commodity by
commodity, what is the most efficient way to select samples. Samples are selected at the
national level for some commodities, and BLS research will continue on the geographic
structure underlying the CPI.
Recommendation viii
The BLS should investigate the impact of classification, that is item group
definition and structure, on the price indexes to improve the ability of the index to
fully capture item substitution.
The BLS instituted a new item structure for the CPI in January 1998 that was designed
with an emphasis on its ability to capture consumer substitution. BLS will continue to
work to improve the item structure within the normal framework of index revisions.
Meanwhile, it will continue its research on substitution across item categories, focusing
on the development of superlative measures of the cost of living.
Recommendation ix
There are a number of additional conceptual issues that require attention. The
price of durables, such as cars, should be converted to a price of annual services, along
the same lines as the current treatment of the price of owner-occupied housing. Also, the
treatment of "insurance" should move to an ex-ante consumer price measure rather
than the currently used ex-post insurance profits based measure.
The BLS is sympathetic to the general spirit of this recommendation and is
investigating the flow-of-services approach for automobiles. The flow-of-services approach
does not, however, appear to be practicable for most durables due to the lack of
widespread rental markets and the lack of data that would be needed for direct estimation
of user cost. Automobile and tenants insurance policies currently are priced directly in
the CPI but health insurance is not, due to difficulties in maintaining constant quality
and coverage of risk over time.
Recommendation x
The BLS needs a permanent mechanism for bringing outside information, expertise,
and research results to it. At the request of the BLS, this group should be organized by
an independent public professional entity and would provide BLS an improved channel to
access professional and business opinion on statistical, economic and current market
issues.
The BLS has in place many mechanisms for bringing in outside information, expertise,
and research results from business, labor, academic researchers, professional
economic/statistics organizations, and other Federal statistical agencies. The BLS will
continue to actively solicit such help.
Recommendation xi
The BLS should develop a research program to look beyond its current "market
basket" framework for the CPI.
The BLS has no specific plans to implement this recommendation. Measurement of changes
in "quality of life" may require too many subjective judgments to furnish an
acceptable basis for adjusting the CPI. Furthermore, it is unclear whether "quality
of life" valuations are an appropriate part of an index of change in the price of
market goods and services.
Recommendation xii
The BLS should investigate the ramifications of the embedded assumption of price
equilibrium and the implications of it sometimes not holding.
The BLS agrees with this recommendation, has made considerable progress in reducing
reliance on quality adjustment methods that require strong price equilibrium assumptions,
and plans to continue research and progress in this area.
Recommendation xiii
The BLS will require a number of new data collection initiatives to make some
progress along these lines. Most important, data on detailed time use from a large sample
of consumers must be developed.
The BLS agrees that measures of time use have research value and currently is
undertaking a study of time use, but considers such studies to be supplementary to rather
than a part of the CPI’s particular cost of living framework.
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Last Modified Date: October 16, 2001
Bureau of Labor Statistics
