Posted Content•
Indexing Inflation: The Impact of Methodology on Econometrics and Macroeconomic Policy
TL;DR: In this paper, the authors highlight the practical significance of methodological choices made in the course of indexing inflation and highlight the importance of the implicit price deflator of the gross domestic product (IPD) as the best measure of real growth and price change in the national economy.
Abstract: Because there is no perfect gauge of inflation, the macroeconomic enterprise of indexing inflation ultimately dissolves into a choice among imperfect methodologies. But that choice still matters. This article will highlight the practical significance of methodological choices made in the course of indexing inflation. It will focus on two different indexes of inflation in the United States: the Consumer Price Index (CPI) and the implicit price deflator of the gross domestic product (IPD). This article identifies a long-term gap in these competing indexes’ measurement of inflation. To explain why the CPI appears to overstate inflation, relative to the IPD, by roughly two-thirds of a percentage point each year, this article more fully describes the distinct methodologies underlying the CPI and the IPD. Lawmakers should adopt the implicit price deflator of the GDP, or some other inflation index that shares its best methodological features, as the best practicable measure of real growth and price change in the national economy.
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01 Jan 2016
TL;DR: The call came from Lamar Alexander, former governor of Tennessee and recently appointed by President Bush to be Secretary of Education, who invited me to come to Washington and tell him what I thought he should do.
Abstract: guess I was ready when the call came. Although hard at work on a new book, I felt the stirrings of a vague kind of restlessness, the sort that used to draw people in other times to go to sea, join the circus, or hit the road. The call came from Lamar Alexander, former governor of Tennessee and recently appointed by President Bush to be Secretary of Education. He invited me to come to Washington and tell him what I thought he should do. To those of us who spend our hours hoping to speak truth to power, never quite sure whether anyone is listening, the invitation was irresistible. At lunch a week later, Alexander and his deputy, David Kearns, former chairman of Xerox, listened to me intently on the subject of education (later they told me they couldn't get a word in edgewise). A few days later, Alexander asked me to join his team. We would start a crusade to improve education, he said, and my assignment would be to put the topic of standards high on the nation's agenda. Despite my aforementioned restlessness, I truly didn't want to do it; I liked working at home in jeans and didn't want to feel compelled to go to an office every day. As a writer and academic, I had never had to mouth anyone else's opinions or defer to any party line; besides, I was a lifelong Democrat. But Alexander said to me, "Sometimes in your life, the right combination of people, ideas, and opportunities come together. And when it happens, you have to take a chance." I heard the music begin to swell in the background, and my brain seemed flooded with cliches about seizing the day, daring greatly, entering the arena, and all that. I believed it. In July 1991, 1 was sworn into office as Assistant Secretary in the U.S. Department of Educa-
12 citations
Book•
08 May 2013
TL;DR: In this article, the authors provide technical and logistical information on how the Chained Consumer Price Index for all Urban Consumers (C-CPI-U) is constructed and reported by the U.S. Bureau of Labor Statistics.
Abstract: Report that provides technical and logistical information on how the Chained Consumer Price Index for all Urban Consumers (C-CPI-U) is constructed and reported by the U.S. Bureau of Labor Statistics (BLS). It explains methodological and statistical differences between the standard Consumer Price Index (CPI) and the C-CPI-U. It then addresses a key impediment to moving to the C-CPI-U.
3 citations
07 Mar 2014
TL;DR: In this paper, the authors examined the budgetary and distributional effects of using the chained consumer price index (C-CPI-U) as the official measure of inflation for adjusting federal revenue and spending programs for inflation.
Abstract: This report examines the budgetary and distributional effects of using what is referred to as the Chained Consumer Price Index (C-CPI-U or chained CPI) as the official measure of inflation for adjusting federal revenue and spending programs for inflation.
1 citations
References
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Posted Content•
TL;DR: In this paper, the substitution bias of the Laspeyres index was investigated and the magnitude of the bias was found to depend on the size of substitution substitution elasticities, i.e., the ratio of the minimum expenditures under two different price regimes necessary to maintain a constant level of utility.
Abstract: The most commonly used measure of the cost of living, the Consumer Price Index (CPI) published by the Bureau of Labor Statistics, is essentially a Laspeyres price index. It is well-known, however, that a Laspeyres price index provides an upward biased estimate of the cost of living, because in keeping the same base period basket of goods as weights, it does not take into account substitution among commodities induced by relative price changes. The magnitude of the bias is an empirical question, which is the focus of this study. An estimate of the substitution bias may be obtained by taking the difference between the Laspeyres price index and an estimated true cost-of-living index. The true cost-of-living index (CLI) is based on the theory of consumer demand. It is the ratio of the minimum expenditures under two different price regimes necessary to maintain a constant level of utility (as opposed to the constant basket of goods in the Laspeyres index).' The size of the bias depends on two factors: 1) the size of consumption substitution elasticities (if there is no commodity substitution then the CLI and Laspeyres index coincide, regardless of changes in relative prices); and 2) the magnitude of relative price changes (if all prices move together then the CLI and Laspeyres index again coincide, regardless of the size of substitution elasticities). In order to compute a true CLI it is necessary to specify a particular utility function and estimate the parameters of the resulting system of demand equations (see, for example, Louis Phlips, p. 135). Several estimates of the magnitude of the substitution bias have appeared in the literature, but all previous studies suffer from a common weakness-they are all based on a very small number of commodities, essentially because of econometric problems involved in estimating large systems of demand equations. In one group of studies, demand models have been estimated using highly aggregated data, in which total consumption is grouped into four to nine aggregate "commodites" (such as housing, durables, or clothing). Arthur Goldberger and Theodore Gamaletsos, for example, estimate the linear expenditure system (LES) demand model using data on five aggregate goods for several European countries, and compare the resulting CLI for one of the countries (Greece) to the corresponding Laspeyres price index. Tran Van Hoa estimates costof-living indexes for six Australian provinces using data on nine aggregate goods. Phlips cites work by R. Sanz-Ferrer, who computed a CLI for Belgium from data on eight aggregate commodities. In such studies using highly aggregated data, the estimate of the substitution bias may be understated because the aggregation obscures substitution in consumption within categories, which is perhaps more prevalent than substitution between gross aggregates. Another shortcoming of these three aggregate studies is the fact that they use only a single demand system, and hence do not explore the sensitivity of the CLI to a priori *U.S. Bureau of Labor Statistics. The groundwork for this study was my dissertation. I would like to thank the chairman and members of my committee, R. Robert Russell, Llad Phillips, and Robert Deacon, for their support and helpful suggestions, and Jack Triplett, Robert Pollak, Richard J. McDonald, and a referee for valuable comments on an earlier version. The views expressed are my own and do not necessarily reflect the policies of the Bureau of Labor Statistics. 'For a theoretical discussion of cost-of-living indexes, see Robert Pollak (1971b), and Paul Samuelson and Subramanian Swamy.
163 citations
Posted Content•
TL;DR: In this article, a superlative index is proposed to aggregate prices across the item-area strata of the consumer price index (CPI), which can be published with the same timeliness as the CPI.
Abstract: The Consumer Price Index does not take into account the fact that consumers alter the composition of their purchases in response to changes in relative prices. This substitution effect will cause the CPI to grow faster than the cost of living. This paper presents new estimates showing that this bias in the CPI averaged 0.3 percentage points per year between December 1986 and December 1995. This bias could be eliminated by using a superlative index to aggregate prices across the item-area strata of the CPI. The paper discusses the practical difficulties in implementing such a calculation and suggests a method for overcoming them. In particular, it shows how to construct an accurate approximation to a superlative price index that can be published with the same timeliness as the CPI.
112 citations
01 Jan 1995
TL;DR: In this article, the authors restate the price weights of the commodities for one of the two periods so that they reflect the same quantities as the weights for the other period, and compare the current dollar output share in with the current-dollar output share of a commodity in the previous period.
Abstract: . In considering whether the price of a commodity has increased more or less rapidly than prices of other commodities from one period to another, it is necessary to restate the price weights of the commodities for one of the two periods so that they reflect the same quantities as the weights for the other period. For example, to compare the price of a commodity in with the price in , output shares in valued in and prices may be compared. It would be incorrect to compare the current-dollar output share in with the current-dollar output share in because such comparisons are affected by changes in both prices and quantities.
53 citations
Journal Article•
TL;DR: Johnson et al. as mentioned in this paper introduced a geometric means formula to account for lower-level substitution, and introduced the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) to provide an index that accounts for upper-level substitutions.
Abstract: David S. Johnson, Stephen B. Reed, and Kenneth J. Stewart The report by the U.S. Advisory Commission to Study the Consumer Price Index (known more commonly as the Boskin Report), issued on December 4, 1996, addressed the broad conceptual question of whether a cost-of-living index (COLI) should be the measurement objective of a price index and focused attention on three key problems inherent in the calculation of consumer price indexes: consumer substitution, quality change, and new goods. These issues received further attention in the 2002 report produced by an 11-member panel convened by the Committee on National Statistics entitled At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes (known as the CNSTAT Report).1 Subsequent to the Boskin Report, the Bureau of Labor Statistics (BLS) reaffirmed its cost-of-living conceptual framework and, building on prior research, introduced methodological changes that have addressed the substitution, quality, and new-goods issues. These include the following: 1) the introduction of the geometric means formula to account for lower-level substitution, 2) the introduction of the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) to provide an index that accounts for upper-level substitution, 3) expansion of the use of hedonic models to improve the measurement of quality change, and 4) the institution of procedures to introduce new goods into the index more quickly by more frequent updates to the item samples. This article details these methodological changes and provides some estimate of their quantitative impact.
47 citations
Journal Article•
TL;DR: A number of longstanding myths regarding the Consumer Price Index and its methods of construction continue to circulate; this article attempts to address some of the misconceptions, with an eye toward increasing public understanding of this key economic indicator as discussed by the authors.
Abstract: A number of longstanding myths regarding the Consumer Price Index and its methods of construction continue to circulate; this article attempts to address some of the misconceptions, with an eye toward increasing public understanding of this key economic indicator T he Consumer Price Index (CPI), published by the Bureau of Labor Statistics (BLS), has generated controversy throughout its history. A soon-to-be-published article by Marshall Reinsdorf and Jack Triplett discusses the many past reviews of the methods and data used in the CPI's construction.
24 citations