Mismeasurement in the Consumer Price Index: An Evaluation
Matthew Shapiro and
David Wilcox ()
No 5590, NBER Working Papers from National Bureau of Economic Research, Inc
A number of analysts have claimed recently that the consumer price index overstates the annual increase in the cost of living. This paper develops a framework for studying measurement problems in the consumer price index and systematically analyzes the available evidence concerning the magnitude of these problems. It concludes that the CPI overstates increases in the cost of living. The evidence suggests that the bias is centered on 1.0 percentage point per year. The extent of this bias is not known exactly. To take into account this uncertainty, the estimated bias is presented in terms of a probability distribution rather than a point estimate or range. We estimate that there is a 10 percent chance that the bias is less than 0.6 percentage point and a 10 percent chance that it is greater than 1.5 percentage points per year. CPI procedures overstate the rate of inflation for medical procedures that are subject to technological improvement. To illustrate this point and to show how better to measure medical care prices, the paper presents a prototypical price index for cataract surgery. This price index grows much more slowly than a price index for cataract surgery constructed using the methodology of the CPI. The paper discusses implications of CPI mismeasurement for monetary and fiscal policy as well as for other official statistics. It also offers some suggestions for improving the CPI.
JEL-codes: C82 E31 (search for similar items in EconPapers)
Note: EFG ME PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45) Track citations by RSS feed
Published as Mismeasurement in the Consumer Price Index: An Evaluation , Matthew D. Shapiro, David W. Wilcox. in NBER Macroeconomics Annual 1996, Volume 11 , Bernanke and Rotemberg. 1996
Downloads: (external link)
Chapter: Mismeasurement in the Consumer Price Index: An Evaluation (1996)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:5590
Ordering information: This working paper can be ordered from
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 ().