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Sources of Bias and Solutions to Bias in the Consumer Price Index

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  • Jerry Hausman

Abstract

Four sources of bias in the Consumer Prices Index (CPI) have been identified. The most discussed is substitution bias, which creates a second order bias in the CPI. Three other changes besides prices changes create first order effects on a correctly measured cost of living index (COLI). I explain in this paper that a "pure price" based approach of surveying prices to estimate a COLI cannot succeed in solving the 3 problems of first order bias. I discuss economic and econometric approaches to measuring the first order bias effects as well as the availability of scanner data that would permit implementation of the techniques.

Suggested Citation

  • Jerry Hausman, 2003. "Sources of Bias and Solutions to Bias in the Consumer Price Index," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 23-44, Winter.
    • Handle: RePEc:aea:jecper:v:17:y:2003:i:1:p:23-44
    Note: DOI: 10.1257/089533003321164930
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    References listed on IDEAS

    as
    1. Pollak, Robert A., 1989. "The Theory of the Cost-of-Living Index," OUP Catalogue, Oxford University Press, number 9780195058703.
    2. Hausman, Jerry, 1999. "Cellular Telephone, New Products, and the CPI," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(2), pages 188-194, April.
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