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A Survey of Measurement Biases in Price Indexes

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  • Wynne, Mark A
  • Sigalla, Fiona D

Abstract

This paper reviews the literature on measurement error in the major US price indexes?the Consumer Price Index (CPI), the Producer Price Index (RPI), and the Gross Domestic Product (GDP) deflators. We take as our point of departure Triplett's, 1975, survey and focus on the studies of measurement error that have appeared since then. We review the problems of substitution bias, quality bias, new goods bias, and outlet substitution bias that are generally considered to be the main sources of error in price indexes. The bulk of the paper is devoted to problems in the CPI and PPI, as the GDP deflators tend to be based mainly on the components of these series. We find that there has been surprisingly little work on the problem of overall measurement error in any of these price indexes, and we conclude that there is very little scientific basis for the commonly accepted notion that measured inflation at 2 to 3 percent a year is consistent with price stability.
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Suggested Citation

  • Wynne, Mark A & Sigalla, Fiona D, 1996. "A Survey of Measurement Biases in Price Indexes," Journal of Economic Surveys, Wiley Blackwell, vol. 10(1), pages 55-89, March.
    • Handle: RePEc:bla:jecsur:v:10:y:1996:i:1:p:55-89
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    Cited by:

    1. George A. Kahn, 1994. "Achieving price stability: a 1993 report card," Economic Review, Federal Reserve Bank of Kansas City, vol. 79(Q I), pages 5-18.
    2. Todd E. Clark, 1999. "A comparison of the CPI and the PCE price index," Economic Review, Federal Reserve Bank of Kansas City, vol. 84(Q III), pages 15-29.
    3. Dimitri B. Papadimitriou & L. Randall Wray, 1996. "The Consumer Price Index As a Measure of Inflation," Economics Working Paper Archive wp_164, Levy Economics Institute.
    4. Michael F. Bryan & Stephen G. Cecchetti, 1993. "The consumer price index as a measure of inflation," Economic Review, Federal Reserve Bank of Cleveland, vol. 29(Q IV), pages 15-24.
    5. Freeman, Scott L. & Niefer, Mark J. & Roop, Joseph M., 1997. "Measuring industrial energy intensity: practical issues and problems," Energy Policy, Elsevier, vol. 25(7-9), pages 703-714.
    6. Stephen G. Cecchetti, 1997. "Measuring short-run inflation for central bankers," Review, Federal Reserve Bank of St. Louis, issue May, pages 143-155.
    7. Jung, Alexander, 2024. "The quantity theory of money, 1870-2020," Working Paper Series 2940, European Central Bank.
    8. Timothy F. Bresnahan & Robert J. Gordon, 1996. "Introduction to "The Economics of New Goods"," NBER Chapters, in: The Economics of New Goods, pages 1-26, National Bureau of Economic Research, Inc.
    9. Mark A. Wynne & Diego Rodriguez‐Palenzuela, 2004. "Measurement Bias in the HICP: What do we know and What do we need to know?," Journal of Economic Surveys, Wiley Blackwell, vol. 18(1), pages 79-112, February.
    10. Inoue, Tetsuya, 1998. "Impact of Information Technology and Implications for Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 16(2), pages 29-60, December.
    11. Hoffmann, Johannes, 1998. "Problems of inflation measurement in Germany," Discussion Paper Series 1: Economic Studies 1998,01e, Deutsche Bundesbank.
    12. James Gorry & Dean Scrimgeour, 2018. "Using Engel Curves To Estimate Consumer Price Index Bias For The Elderly," Contemporary Economic Policy, Western Economic Association International, vol. 36(3), pages 539-553, July.
    13. George A. Kahn, 1995. "Progress toward price stability: a report card for 1994," Economic Review, Federal Reserve Bank of Kansas City, vol. 80(Q I), pages 5-18.
    14. Mark A. Wynne, 1995. "Sticky prices: what is the evidence?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q I, pages 1-12.
    15. Todd E. Clark, 1996. "U.S. inflation developments in 1995," Economic Review, Federal Reserve Bank of Kansas City, vol. 81(Q I), pages 27-42.
    16. Todd E. Clark, 1997. "U.S. inflation developments in 1996," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 11-30.
    17. Dimitri B. Papadimitriou & L. Randall Wray, "undated". "Targeting Inflation, The Effects of Monetary Policy on the CPI and Its Housing Component," Economics Public Policy Brief Archive ppb_27, Levy Economics Institute.
    18. Evan F. Koenig, 1994. "Capacity utilization and the evolution of manufacturing output: a closer look at the \"bounce-back effect.\"," Working Papers 9402, Federal Reserve Bank of Dallas.

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