The Consumer Price Index as a Measure of Inflation

Michael F. Bryan and Stephen Cecchetti

No 4505, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: As inflation approaches zero, it becomes increasingly important to examine the price indices on which monetary policy is based. The most popularly used aggregate price statistic in the U.S. is the Consumer Price Index (CPI), a statistic that appears to be a focal point in monetary policy deliberations. A problem associated with using the CPI, a fixed weight index of the cost-of-living, is that there are likely to be biases in the index as a measure of inflation. In this paper we use a simple statistical framework to compute a price index that is immune to one of the potentially important biases inherent in the CPI as a measure of inflation--weighting bias. Utilizing a dynamic factor model we are able to compute the common inflation element in a broad cross-section of consumer price changes. Our conclusion is that, although there was a large positive weighting bias during the fifteen years beginning in 1967, since 1981 the weighting bias in the CPI as a measure of inflation has been insignificant.

JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 1993-10
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (92)

Published as Economic Review of the Federal Reserve, Bank of Cleveland, vol. 29, no. 4 1993, Quarter 4, p. 15-24

Downloads: (external link)
http://www.nber.org/papers/w4505.pdf (application/pdf)

Related works:
Journal Article: The consumer price index as a measure of inflation (1993)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:4505

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w4505

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().