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

U.S. Federal Reserve Board - Macroeconomic Analysis Section

Jeremy B. Rudd

Federal Reserve Board - Macroeconomic Analysis Section

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). FEDS Working Paper No. 2001-61. Available at SSRN: https://ssrn.com/abstract=295634 or http://dx.doi.org/10.2139/ssrn.295634

David E. Lebow (Contact Author)

U.S. Federal Reserve Board - Macroeconomic Analysis Section ( email )

20th & C. St., N.W.
Mailstop 80
Washington, DC 20551
United States
202-452-3057 (Phone)
202-452-3819 (Fax)

Jeremy B. Rudd

Federal Reserve Board - Macroeconomic Analysis Section ( email )

20th & C. St., N.W.
Mailstop 80
Washington, DC 20551
United States
202-452-3780 (Phone)
202-452-3819 (Fax)

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