How Much Does Formula vs. Chaining Matter for a Cost-of-Living Index? The CPI-U vs. the C-CPI-U

Gregory Kurtzon

No 498, Economic Working Papers from Bureau of Labor Statistics

Abstract: A large economics literature has debated the best formula to estimate a cost-of-living index (COLI) - this study shows that formula may not be relevant for many purposes for an index chained at a monthly frequency if current weight information is properly used. The large majority of the difference between the levels of the CPI-U and the generally lower C-CPI- U (a COLI) is due to the CPI-U weights holding quantities constant over long periods, rather than the difference in formula assumptions. A new method to avoid chain drift with long term price relatives is developed to effectively approximate a COLI.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:bls:wpaper:498

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