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Formula Bias And Within-Stratum Substitution Bias In The U.S. CPI

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  • Marshall B. Reinsdorf

Abstract

In 1978 BLS adopted an estimator for U.S. CPI component indexes that incorporates scientific samples of outlets and varieties and that allows the calculation of reliable standard errors. Consumer substitution of outlets and varieties offering better values could cause bias in these indexes. A more important source of bias is, however, a tendency to give excessive weight to items whose initial price is temporarily low. The empirical evidence is striking. Average price series and matched food CPIs grew at almost the same rate before 1978, but between 1980 and 1992 the CPIs average about 1.4% per year more growth. For unleaded gasoline, the discrepancy averages 0.8% per year. © 1998 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • Marshall B. Reinsdorf, 1998. "Formula Bias And Within-Stratum Substitution Bias In The U.S. CPI," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 175-187, May.
    • Handle: RePEc:tpr:restat:v:80:y:1998:i:2:p:175-187
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    Cited by:

    1. Ingvild Almås & Tim Beatty & Thomas Crossley, 2018. "Lost in translation: What do Engel curves tell us about the cost of living?," IFS Working Papers W18/04, Institute for Fiscal Studies.
    2. Campbell, Douglas L., 2016. "Measurement matters: Productivity-adjusted weighted average relative price indices," Journal of International Money and Finance, Elsevier, vol. 61(C), pages 45-81.
    3. Kovács, Ilona, 2003. "A fogyasztói árindex torzító tényezői [Distorting factors in the consumer price index]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 702-719.
    4. Campbell, Douglas L & Pyun, Ju Hyun, 2014. "Through the Looking Glass: A WARPed View of Real Exchange Rate History," MPRA Paper 55870, University Library of Munich, Germany.
    5. Diewert, W. Erwin & Fox, Kevin J., 2016. "Kevin J. Fox Interview of W. Erwin Diewert," Microeconomics.ca working papers erwin_diewert-2016-6, Vancouver School of Economics, revised 02 Jun 2016.
    6. Charles Steindel, 1999. "The impact of reduced inflation estimates on real output and productivity growth," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Jun).
    7. 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.

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