Executive Summary

Recommendation i

The BLS should establish a cost of living index (COLI) as its objective in measuring consumer prices.

The BLS has no fundamental disagreement with the commission about what the objective of the CPI should be, though we would emphasize that it is important to be clear about what precisely one means by a cost-of-living index. We will continue to exercise our judgment on the appropriateness of taking any specific step designed to bring the CPI closer to a true cost-of-living index, bearing in mind that it is crucial that any official statistic be based on rigorous, objective methods.

Recommendations ii, iii, and iv

The BLS should develop and publish two indexes: one published monthly and one published and updated annually and revised historically.

The timely, monthly index should continue to be called the CPI and should move toward a COLI concept by adopting a "superlative" index formula to account for change market baskets, abandoning the pretense of sustaining the fixed-weight Laspeyres formula.

The new annual COL index would use a compatible "superlative-index" formula and reflect subsequent data, updated weights, and the introduction of new goods (with their history extended backward).

The BLS does not accept the specifics of these recommendations but has initiatives underway to address upper-level substitution bias and the currency of the CPI market basket. Further research is needed to determine whether experimental techniques that approximate a superlative index would yield a more accurate monthly measure. We believe that hasty implementation of such techniques in the production of the monthly CPI without more complete testing would damage the credibility of our statistical system. The BLS has requested funds to support publication of a superlative index as a complement to the CPI beginning in 2002. Additionally, the BLS has requested funds to expand the Consumer Expenditure Survey sample size and develop enhanced computer systems to support the timely introduction of more current spending data when the index weights are next updated. Finally, the BLS will announce a decision to make more frequent updates to expenditure weights in the near future.

Recommendation v

The BLS should change its procedure for combining price quotations by moving to geometric means at the elementary aggregates level.

The geometric mean formula for aggregating price quotations has been under investigation by the BLS over the past several years. On April 17, 1998 the BLS announced that the geometric mean formula will be used in the CPI in place of the current Laspeyres formula in all item strata except for selected shelter services, selected utilities and government charges and selected medical services. This change will be implemented with the CPI release for January 1999. Our best estimate is that the planned use of the geometric mean formula will lower the growth rate of the CPI by approximately 0.2 percentage point per year. A discussion of the decision and the rationale for the adoption of the geometric mean formula is presented in the paper entitled "Planned Change in the Consumer Price Index Formula" which is appended to this document.

Additional recommendation regarding expanded use of hedonic regressions for making quality adjustments.

The BLS agrees with the commission that the use of hedonic regression techniques in quality adjustment should be expanded. The BLS has used hedonic quality adjustment for selected CPI components for several years, has recently extended its use to additional components, and has requested funds for continued expansion.

Recommendation vi

The BLS should study the behavior of the individual components of the index to ascertain which components provide most information on the future longer-term movements in the index and which items have fluctuations which are largely unrelated to the total and emphasize the former in its data collection activities.

The BLS believes that this proposed redirection of data collection efforts would be inconsistent with the primary objective of the CPI–to approximate changes in the cost of living. BLS thus does not plan to implement this recommendation.

Recommendation vii

The BLS should change the CPI sampling procedures to de-emphasize geography, starting first with sampling the universe of commodities to be priced and then deciding, commodity by commodity, what is the most efficient way to collect a representative sample of prices from which outlets, and only later turn to geographically clustered samples for the economy of data collection.

The BLS has no specific plans to implement changes to sampling procedures in connection with this recommendation. It is the current BLS practice to decide, commodity by commodity, what is the most efficient way to select samples. Samples are selected at the national level for some commodities, and BLS research will continue on the geographic structure underlying the CPI.

Recommendation viii

The BLS should investigate the impact of classification, that is item group definition and structure, on the price indexes to improve the ability of the index to fully capture item substitution.

The BLS instituted a new item structure for the CPI in January 1998 that was designed with an emphasis on its ability to capture consumer substitution. BLS will continue to work to improve the item structure within the normal framework of index revisions. Meanwhile, it will continue its research on substitution across item categories, focusing on the development of superlative measures of the cost of living.

Recommendation ix

There are a number of additional conceptual issues that require attention. The price of durables, such as cars, should be converted to a price of annual services, along the same lines as the current treatment of the price of owner-occupied housing. Also, the treatment of "insurance" should move to an ex-ante consumer price measure rather than the currently used ex-post insurance profits based measure.

The BLS is sympathetic to the general spirit of this recommendation and is investigating the flow-of-services approach for automobiles. The flow-of-services approach does not, however, appear to be practicable for most durables due to the lack of widespread rental markets and the lack of data that would be needed for direct estimation of user cost. Automobile and tenants insurance policies currently are priced directly in the CPI but health insurance is not, due to difficulties in maintaining constant quality and coverage of risk over time.

Recommendation x

The BLS needs a permanent mechanism for bringing outside information, expertise, and research results to it. At the request of the BLS, this group should be organized by an independent public professional entity and would provide BLS an improved channel to access professional and business opinion on statistical, economic and current market issues.

The BLS has in place many mechanisms for bringing in outside information, expertise, and research results from business, labor, academic researchers, professional economic/statistics organizations, and other Federal statistical agencies. The BLS will continue to actively solicit such help.

Recommendation xi

The BLS should develop a research program to look beyond its current "market basket" framework for the CPI.

The BLS has no specific plans to implement this recommendation. Measurement of changes in "quality of life" may require too many subjective judgments to furnish an acceptable basis for adjusting the CPI. Furthermore, it is unclear whether "quality of life" valuations are an appropriate part of an index of change in the price of market goods and services.

Recommendation xii

The BLS should investigate the ramifications of the embedded assumption of price equilibrium and the implications of it sometimes not holding.

The BLS agrees with this recommendation, has made considerable progress in reducing reliance on quality adjustment methods that require strong price equilibrium assumptions, and plans to continue research and progress in this area.

Recommendation xiii

The BLS will require a number of new data collection initiatives to make some progress along these lines. Most important, data on detailed time use from a large sample of consumers must be developed.

The BLS agrees that measures of time use have research value and currently is undertaking a study of time use, but considers such studies to be supplementary to rather than a part of the CPI’s particular cost of living framework.

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Last Modified Date: October 16, 2001