Showing papers on "Consumer price index published in 1996"

Mismeasurement in the Consumer Price Index: An Evaluation

Abstract: A number of analysts have claimed recently that the consumer price index overstates the annual increase in the cost of living. This paper develops a framework for studying measurement problems in the consumer price index and systematically analyzes the available evidence concerning the magnitude of these problems. It concludes that the CPI overstates increases in the cost of living. The evidence suggests that the bias is centered on 1.0 percentage point per year. The extent of this bias is not known exactly. To take into account this uncertainty, the estimated bias is presented in terms of a probability distribution rather than a point estimate or range. We estimate that there is a 10 percent chance that the bias is less than 0.6 percentage point and a 10 percent chance that it is greater than 1.5 percentage points per year. CPI procedures overstate the rate of inflation for medical procedures that are subject to technological improvement. To illustrate this point and to show how better to measure medical care prices, the paper presents a prototypical price index for cataract surgery. This price index grows much more slowly than a price index for cataract surgery constructed using the methodology of the CPI. The paper discusses implications of CPI mismeasurement for monetary and fiscal policy as well as for other official statistics. It also offers some suggestions for improving the CPI.

Comment on CPI Biases

Abstract: Commenting on Klumpner's paper, Diewert agrees on the size of the substitution bias. The formula bias might be 0.5 percent per year rather than 0.1 to 0.3 percent. The outlet substitution bias may be larger than zero. Although adjustment for quality bias is difficult, BLS does the best it can. New product bias is significantly larger than Klumpner estimates. Diewert concludes the total CPI bias is 1.3 to 1.7 percent per year. He adds that the statistical agencies should modify their procedures to deal with a rapidly growing number of commodities rather than simply measuring prices and quantities of a fixed list of commodities.

How prices and macroeconomic policies affect agricultural supply and the environment

Abstract: The author studies the literature on how agricultural prices and macroeconomic policies affect agricultural supply and how that supply affects the environment. He addresses the question of how effective agricultural incentives are in boosting the agricultural supply, particularly in sub-Saharan Africa. The literature generalizes that farmers are rational. They increase their output in response to an increase in real output prices. The agricultural supply response is inelastic in the short run, but elasticities for individual crops are generally higher that those for aggregate output. Elasticities are higher in the long run that in the short. In theory, if farmers are rational, if output responds to price increases, measures should be taken to eliminate price distortion. There are four potential sources of bias in the estimates: a) disregard for the simultaneity of variables; b) the ommission of key variables; c) improper pooling of data from different countries; and d) in most time series studies, the aggregate supply response is treated as reversible, but, according to fixed assets theory, the supply response is irreversible. There is clearly a link between agricultural incentives and the environment. But quantitative data on relative aspects of the subject are very inadequate.

Improving the Efficiency of the U.S. CPI

Abstract: In this paper some of the practical issues related to improving the U.S. Consumer Price Index (CPI) are discussed. The general problem of choosing an appropriate price index number formula is presented and both the axiomatic and economic theoretic approaches are used to examine the problem. An argument is presented for the use of Tornqvist and geometric formulations to resolve the current problems of formula bias. Potential sources of cost savings related to probability sampling are discussed and various methods of quality adjustment currently used in the CPI are evaluated. The paper concludes with a number of recommendations that involve statistical policy actions that are necessary to achieve the efficiencies and improvements suggested.

Improving the Efficiency of the U.S. CPI

Abstract: In this paper some of the practical issues related to improving the U.S. Consumer Price Index (CPI) are discussed. The general problem of choosing an appropriate price index number formula is presented and both the axiomatic and economic theoretic approaches are used to examine the problem. An argument is presented for the use of Tornqvist and geometric formulations to resolve the current problems of formula bias. Potential sources of cost savings related to probability sampling are discussed and various methods of quality adjustment currently used in the CPI are evaluated. The paper concludes with a number of recommendations that involve statistical policy actions that are necessary to achieve the efficiencies and improvements suggested.

Effects of inflation on Ivorian fiscal variables: an econometric investigation

Abstract: This paper analyses the effects of inflation on Ivoiran fiscal variables by using the Aghevli-Khan model (1978) to estimate the time required for a change in the consumer price index to be fully reflected in the variables.

Core CPI: Excluding Food, Energy . . . and Used Cars?

Abstract: Although used car prices represent only a small portion of the consumer price index, their extreme volatility has had a major impact on the measured inflation rate. To explain this relationship, the authors describe how used cars are treated in the CPI and explore what might cause the wide swings in used car prices.

Sources of Bias in Consumer Price Indexes

Abstract: In this brief paper, we review the recent literature on sources of bias in consumer price indexes.

New Goods As a Challenge for Index Number Making

Abstract: The basic technology for the making of price indexes is long established (for the early history, see Diewert 1993a) -so much so that many treat price index making as a purely mechanical exercise. This is despite the pervasive importance of price indexes in both real world economic affairs and economic research. Values of the Consumer Price Index (CPI) affect the determination of national monetary policies, the behaviour of financial investors, transfer payments to individuals, wage negotiations, and much more. The index number methods pioneered for consumer price index construction are used as well, in modified forms, for producing a variety of other price and quantity indexes. And price index values directly enter into the construction of measures of national output such as real GDP and measures of productivity for the Canadian economy. The underlying technology for the construction of price and quantity indexes makes use of price and quantity measurements over time for a basket of goods and services that is viewed conceptually as being fixed in composition. This fixed basket is supposed to be representative of the universe of goods and services covered by an index. So what about new goods? What are new goods, for a start? How can they be brought into a "fixed basket"? The questions considered in this note challenge the prevalent view that the important problems of index number making have all been solved. A longer companion paper considers these issues in greater depth, and documents the treatment of new goods in the producer price index systems of Canada and Japan (see Baldwin, Despres, Nakamura and Nakamura, 1996). Alternative definitions of new goods are considered in sections I and II. Sections III-V deal with the conceptual relationships of new goods, varieties of goods, and new processes for producing goods. Section VI concludes.

The Consumer Price Index As a Measure of Inflation

Abstract: Recent low and stable inflation rates are, according to most observers, the result of the Federal Reserve's monetary policy, and most observers do not seem to question that the Fed's sole responsibility is to fight inflation. However, as Executive Director Dimitri B. Papadimitriou and Research Associate L. Randall Wray, have shown, the Fed has not been successful in selecting a monetary policy target that is closely correlated with inflation. In response to this flaw, some theorists and policymakers have advocated the use of an aggregate price index as both the target and the goal of monetary policy. In this paper, and Wray evaluate the most frequently suggested of these indexes-the consumer price index (CPI)-for its appropriateness as a monetary policy target. They determine first which of the CPI's components have tended to raise it and then how a change in monetary policy would affect these components. They conclude that there are serious empirical questions about the transmission mechanisms through which monetary policy is supposed to affect the CPI. Therefore, even if it represented a perfect measure of the cost of living, they would still disagree with its use as a measure for monetary policy.

Improving the Efficiency of the U.S. CPI

Abstract: In this paper some of the practical issues related to improving the U.S. Consumer Price Index (CPI) are discussed. The general problem of choosing an appropriate price index number formula is presented and both the axiomatic and economic theoretic approaches are used to examine the problem. An argument is presented for the use of Tornqvist and geometric formulations to resolve the current problems of formula bias. Potential sources of cost savings related to probability sampling are discussed and various methods of quality adjustment currently used in the CPI are evaluated. The paper concludes with a number of recommendations that involve statistical policy actions that are necessary to achieve the efficiencies and improvements suggested.

Doing It Right? The U.S. Labor Market Response to the 1980s–1990s

Abstract: Many European analysts and policymakers view the U.S. labor market as a paradise of neoclassical flexibility. Wages respond rapidly to changes in supply and demand in local labor markets with little institutional intervention. Jobs are readily created for those who seek them. Firms hire and fire at will, with little government or union restrictions. Spells of unemployment are short in duration, and unemployment benefits modest. As a result, the story goes, the United States has avoided the long extensive joblessness that has characterized Europe since the early 1980s.