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Sources of Bias and Solutions to Bias in the Consumer Price Index

Jerry Hausman

Journal of Economic Perspectives, 2003, vol. 17, issue 1, 23-44

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.

Date: 2003
Note: DOI: 10.1257/089533003321164930
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