Alternative Strategies for Aggregating Prices in the CPI

32 Pages Posted: 11 Jul 2000

See all articles by Matthew D. Shapiro

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

David W. Wilcox

Federal Reserve Board - Division of Research and Statistics

Date Written: March 1997

Abstract

The Consumer Price Index does not take into account the fact that consumers alter the composition of their purchases in response to changes in relative prices. This substitution effect will cause the CPI to grow faster than the cost of living. This paper presents new estimates showing that this bias in the CPI averaged 0.3 percentage points per year between December 1986 and December 1995. This bias could be eliminated by using a superlative index to aggregate prices across the item-area strata of the CPI. The paper discusses the practical difficulties in implementing such a calculation and suggests a method for overcoming them. In particular, it shows how to construct an accurate approximation to a superlative price index that can be published with the same timeliness as the CPI.

Suggested Citation

Shapiro, Matthew D. and Wilcox, David W., Alternative Strategies for Aggregating Prices in the CPI (March 1997). NBER Working Paper No. w5980. Available at SSRN: https://ssrn.com/abstract=225759

Matthew D. Shapiro (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

and Survey Research Center
611 Tappan Street
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National Bureau of Economic Research (NBER) ( email )

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313-764-5419 (Phone)
313-764-2769 (Fax)

David W. Wilcox

Federal Reserve Board - Division of Research and Statistics ( email )

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Washington, DC 20551
United States

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