Sources of Bias and Solutions to Bias in the Consumer Price Index
Open Access
- 1 February 2003
- journal article
- Published by American Economic Association in Journal of Economic Perspectives
- Vol. 17 (1) , 23-44
- https://doi.org/10.1257/089533003321164930
Abstract
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). 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. 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.Keywords
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