Substitution Bias in Multilateral Methods for CPI Construction

The use of multilateral indexes is increasingly an accepted approach for incorporating scanner data in a consumer price index. The attractiveness stems from the ability to be able to control for chain drift bias. Consensus on two key issues has yet to be achieved: (i) the best multilateral method to use, and (ii) the best way of extending the resulting series when new observations become available. We present theoretical and simulation evidence on the extent of substitution biases in alternative methods. Our results suggest the use of the Caves–Christensen–Diewert–Inklaar index with a new method, the “mean splice,” for updating.