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Measurement error in the consumer price index: where do we stand?

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Abstract

We survey the evidence bearing on measurement error in the CPI and provide our best estimate of the magnitude of CPI bias. We also identify a \"weighting\" bias in the CPI that has not been previously discussed in the literature. In total, we estimate that the CPI overstates the change in the cost of living by about 0.6 percentage point per year, with a confidence interval that ranges from 0.1 to 1.2 percentage points. Roughly half of this bias is accounted for by the CPI's inability to fully capture the welfare improvement from quality change and the introduction of new items. Our bias estimate is smaller than that found in several earlier studies, in part because the BLS has recently made a variety of improvements to its procedures; our study highlights several potential areas for further improvement.

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  • David E. Lebow & Jeremy B. Rudd, 2001. "Measurement error in the consumer price index: where do we stand?," Finance and Economics Discussion Series 2001-61, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2001-61
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    Cited by:

    1. Jason G. Cummins & Giovanni L. Violante, 2002. "Investment-Specific Technical Change in the US (1947-2000): Measurement and Macroeconomic Consequences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 243-284, April.
    2. Roy H. Webb, 2004. "Which price index should a central bank employ?," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 90(Spr), pages 63-76.
    3. Martin Berka, 2009. "Nonlinear Adjustment in Law of One Price Deviations and Physical Characteristics of Goods," Review of International Economics, Wiley Blackwell, vol. 17(1), pages 51-73, February.
    4. Andrés Maroto & Luis Rubalcaba, 2008. "Services productivity revisited," The Service Industries Journal, Taylor & Francis Journals, vol. 28(3), pages 337-353, April.
    5. Peter J. Klenow, 2003. "Measuring consumption growth: the impact of new and better products," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 27(Win), pages 10-23.
    6. Daniel Leigh, 2004. "Monetary Policy and the Dangers of Deflation:Lessons from Japan," Economics Working Paper Archive 511, The Johns Hopkins University,Department of Economics.
    7. Bart Hobijn, 2002. "On both sides of the quality bias in price indexes," Staff Reports 157, Federal Reserve Bank of New York.

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