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Alternative Strategies for Aggregating Prices in the CPI

Matthew Shapiro and David Wilcox ()

No 5980, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Consumer Price Index does not take into account the fact that consumers alter the composition of their purchases in response to changes in relative prices. This substitution effect will cause the CPI to grow faster than the cost of living. This paper presents new estimates showing that this bias in the CPI averaged 0.3 percentage points per year between December 1986 and December 1995. This bias could be eliminated by using a superlative index to aggregate prices across the item-area strata of the CPI. The paper discusses the practical difficulties in implementing such a calculation and suggests a method for overcoming them. In particular, it shows how to construct an accurate approximation to a superlative price index that can be published with the same timeliness as the CPI.

JEL-codes: C82 E31 (search for similar items in EconPapers)
Date: 1997-03
Note: EFG ME PR
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Published as Federal Reserve Bank of St. Louis Review, vol 79, no. 3, pp. 113-125, May/June 1997

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