Measurement Error in the Consumer Price Index: Where Do We Stand?

61 Pages Posted: 9 Jan 2002

See all articles by David E. Lebow

David E. Lebow

Board of Governors of the Federal Reserve System

Jeremy B. Rudd

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 2001

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.

Keywords: Consumer Price Index, CPI, CPI bias, price measurement

JEL Classification: C43

Suggested Citation

Lebow, David E. and Rudd, Jeremy B., Measurement Error in the Consumer Price Index: Where Do We Stand? (December 2001). Available at SSRN: https://ssrn.com/abstract=295634 or http://dx.doi.org/10.2139/ssrn.295634

David E. Lebow (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Jeremy B. Rudd

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-3780 (Phone)
202-452-3819 (Fax)

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