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Reconsideration of Weighting and Updating Procedures in the US CPI

Author

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  • Greenlees John S.

    (Research Economists, Division of Price and Index Number Research, US Bureau of Labor Statistics, PSB 3105, 2 Massachusetts Avenue, NE, Washington, DC 20212, USA.)

  • Williams Elliot

    (Research Economists, Division of Price and Index Number Research, US Bureau of Labor Statistics, PSB 3105, 2 Massachusetts Avenue, NE, Washington, DC 20212, USA)

Abstract

In 2002, the US Bureau of Labor Statistics (BLS) introduced a supplemental C-CPI-U employing a superlative formula to provide a closer approximation to a cost-of-living index (COLI). This paper focuses on whether the BLS can improve upon the headline CPI-U’s current biennial weight update process, thereby reducing the CPI-U’s growth rate and bringing the index closer to the C-CPI-U.We begin by estimating superlative price indexes for 1999 through 2007 along with indexes based on the constant-elasticity-of-substitution demand model. Our analyses confirm that the consumer expenditure data underlying the CPI imply substantial consumer substitution, implying that the CPI-U’s Lowe index formula yields higher inflation estimates than would a true COLI.Simulating feasible weight update processes, we find that a Lowe index with two-year weight reference periods but annual updating rises by about 0.03 percentage points less per year than the CPI-U. Another 0.01 percentage point on average is subtracted by imposing annual revision with one-year base periods. Thus, indexes with more timely weights may offer improved representation of current price change, as well as closer approximations to a COLI.

Suggested Citation

  • Greenlees John S. & Williams Elliot, 2010. "Reconsideration of Weighting and Updating Procedures in the US CPI," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 230(6), pages 741-758, December.
    • Handle: RePEc:jns:jbstat:v:230:y:2010:i:6:p:741-758
    DOI: 10.1515/jbnst-2010-0609
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    References listed on IDEAS

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    Cited by:

    1. Gregory Kurtzon, 2022. "How much does formula versus chaining matter for a cost‐of‐living index? The CPI‐U versus the C‐CPI‐U," Economic Inquiry, Western Economic Association International, vol. 60(2), pages 645-667, April.
    2. Paul Armknecht & Mick Silver, 2014. "Post-Laspeyres: The Case for a New Formula for Compiling Consumer Price Indexes," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(2), pages 225-244, June.
    3. Herzberg, Julika & Knetsch, Thomas A. & Schwind, Patrick & Weinand, Sebastian, 2021. "Quantifying bias and inaccuracy of upper-level aggregation in HICPs for Germany and the euro area," Discussion Papers 06/2021, Deutsche Bundesbank.
    4. Ludwig von Auer & Alena Shumskikh, 2022. "Retrospective Computations of Price Index Numbers: Theory and Application," Research Papers in Economics 2022-01, University of Trier, Department of Economics.

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