Introduction

This paper on the Consumer Price Index (CPI) has been prepared in response to an April 29, 1998 request from Representative Christopher Shays, Chairman of the Subcommittee on Human Resources of the House Committee on Government Reform and Oversight, to Katharine Abraham, Commissioner of the Bureau of Labor Statistics (BLS), for an update on the BLS responses to the various recommendations in the report of the Advisory Commission to Study the CPI (the Boskin Commission).1

In a June 1997 paper written in response to Representative Jim Saxton, Chairman of the Joint Economic Committee, the BLS summarized the advisory commission report and set out its views of the analysis and recommendations provided therein. In this paper, after a brief review of background on the recommendations of the Boskin report, we provide our response to the recommendations, which builds on the response prepared for Representative Saxton.

The commission report compares the U.S. CPI to a hypothetical ideal measure of the change in the cost of living and concludes that in several respects the CPI is biased relative to this standard. The categories of bias discussed by the commission include: substitution bias (due in large part to the fixed-weight nature of the index), outlet bias (which may occur if the index does not account for the benefits to consumers from switching to discount outlets), quality change bias (which results when the value of quality differences between the goods priced in two consecutive periods cannot be accurately measured and deducted from the accompanying price difference between the goods), and new product bias (due to the failure to reflect adequately the value to consumers of new products that are introduced into the market).

The advisory commission emphasizes that the U.S. economy is exceedingly complex and dynamic, with the available offerings of goods and services constantly changing. It also acknowledges that index number construction is a complex and difficult task. It recommends that the BLS make several changes in the methods used in constructing the CPI, including more frequent updates of the market basket and expenditure information required by the index and the use of formulas more consistent with the theoretical cost-of-living concept. The focus of public attention has been on the commission’s short-run recommendations: explicit adoption of a cost-of-living index as the measurement objective of the CPI, replacement of the current index by two indexes—a monthly index that takes account of the changing market basket and a second annual index calculated using a "superlative" formula and subject to revision—and use of geometric means for aggregating elementary price quotes.

These short-run recommendations primarily address the issue of substitution bias. The commission also makes several intermediate and longer run methodological and research recommendations. Although some of these are related to outlet, quality change, and new goods biases, the commission does not present a specific or comprehensive program of improvements to solve those difficult potential problems.

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Last Modified Date: October 16, 2001