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September 2006, Vol. 129, No. 9
Interarea price levels: an experimental methodology
Although the Consumer Price Index (CPI) survey is not designed as an interarea survey, it is possible to use its price observations and sampling weights to obtain estimates of area price levels for various categories of consumer expenditure. Combining these estimates across the expenditure categories produces an experimental index of the price level differences for the areas. This was first done some 15 years ago by Mary Kokoski, Patrick Cardiff, Brent Moulton, and Kim Zieschang using 1988–89 prices, and more recently by Bettina Aten using 2003 prices.1 This article shows a shortcut approach for calculating the 2003 interarea prices and repeats the exercise for 2004. It also describes the methodology, presents the detailed results for 2003, and provides a comparison with the 2004 results.
General methodology and data
The headline CPI (the CPI-U) measures the average price change for urban consumers, who comprise approximately 87 percent of the total U.S. population. The CPI collects prices in selected urban areas throughout the country from about 23,000 retail and service establishments. In addition, data on rents are collected for about 50,000 renter-occupied housing units.2 Each price observation has a reference date and represents a good or service that is uniquely identified by a set of characteristics, including the geographic area. Not all areas have the same goods and services priced; rather, items are selected within categories to represent those sold in each area. Each observation also has a weight. The weight is an estimate of the amount of consumer expenditure the observation re-presents. In other contexts this is called the representativity3 of the price in the framework of the probability sample from which it is drawn.
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1 See Mary Kokoski, Patrick Cardiff, and Brent Moulton, "Interarea Price Indices for Consumer Goods and Services: An Hedonic Approach Using CPI Data," working paper No. 256, available from the Office of Prices and Living Conditions, July 1994 and Mary Kokoski, Brent Moulton and Kim Zieschang, "Interarea Price Comparisons for Heterogeneous Goods and Several Levels of Commodity Aggregation," in Alan Heston and Robert Lipsey, eds., International and Interarea Comparisons of Income, Output and Prices, (University of Chicago Press, 1999), pp. 123–66; see also Bettina Aten, "Report on Interarea Price Levels, 2003," working paper No. 2005–11 (Bureau of Economic Analysis, May 2005).
2 See the BLS Web site for detailed information at http://www.bls.gov/cpi/cpiovrvw.htm#item1and http://www.bls.gov/cpi/cpifact6.htm.
3 The term representativity is used in the International Comparison Program to denote the relative importance of items that are priced, usually at a level where expenditure weights are not available. See the World Bank ICP Web site at http://web.worldbank.org.
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