TY  - JOUR
AU  - Hausman,Jerry
TI  - Sources of Bias and Solutions to Bias in the CPI
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9298
PY  - 2002
Y2  - October 2002
UR  - http://www.nber.org/papers/w9298
L1  - http://www.nber.org/papers/w9298.pdf
N1  - Author contact info:
Jerry A. Hausman
Department of Economics
MIT, Room E52-271A
50 Memorial Drive
Cambridge, MA  02139
Tel: 617/253-3644
Fax: 617/253-1330
E-Mail: jhausman@mit.edu
M2  - featured in NBER digest on 2003-03-01
AB  - Four sources of bias in the Consumer Prices Index (CPI) have been identified.  The most discussed is substitution bias, which creates a second order bias in the CPI.  Three other changes besides prices changes create first order effects on a correctly measured cost of living index (COLI).  (1) Introduction of new goods creates a first order effect of  new good bias'  (2) Quality changes in existing goods will lead to  quality' bias, which has first order effects  (3) Shifts in shopping patterns to lower priced stores can create first order  outlet bias'.  I explain in this paper that a  pure price' based approach of surveying prices to estimate a COLI cannot succeed in solving the 3 problems of first order bias. Neither the BLS nor the recent report C. Schultze and C. Mackie, eds., At What Price (AWP, 2002), recognizes that to solve these problems, which have been long known, both quantity and price data are necessary.  I discuss economic and econometric approaches to measuring the first order bias effects as well as the availability of scanner data that would permit implementation of the techniques.  Lastly, I review recent research that demonstrates that these sources of bias are large in relation to measured inflation in the CPI.
ER  -