U.S. Senate, Committee on Finance, Final Report of
the Advisory Commission to Study the Consumer Price Index.
Print 104-72, 104 Cong., 2
sess., (Washington, D.C., Government Printing Office, 1996).
2 Other recent, but more narrowly focused, BLS papers
relating to issues discussed in the Advisory Commission report include Paul A. Armknecht,
Brent R. Moulton, and Kenneth J. Stewart, "Improvements to the food-at-home, shelter
and prescription drug indexes in the U.S. Consumer Price Index," Bureau of Labor
Statistics working paper 263, February 1995; John S. Greenlees, "Expenditure Weight
Updates and Measured Inflation," paper presented at the Third Meeting of the
International Working Group on Price Indices, Voorburg, Netherlands, April 16-18, 1997;
Brent R. Moulton and Karin E. Moses, "Addressing the Quality Change Issue in the
Consumer Price Index," Brookings Papers on Economic Activity, 1997(1):
305-366; and Paul A. Armknecht, Walter F. Lane., and Kenneth J. Stewart, "New
Products and the U.S. CPI," in Timothy Bresnahan and Robert J. Gordon, eds., The
Economics of New Goods, University of Chicago Press, Chicago, 1997.
3 The advisory commission uses two different methods for
numbering their recommendations. See U.S. Senate, Committee on Finance, Final Report,
pp. 2-3 and pp. 49-55. Herein we follow the numbers and text from pp. 2-3.
4 Robert Gillingham, "A Conceptual Framework for the
Consumer Price Index," Proceedings of the American Statistical Association 1974
Business and Economics Section, (Washington, D.C., American Statistical Association,
1974); U.S. Bureau of Labor Statistics, BLS Handbook of Methods, Bulletin 2134-2,
1984, p. 4; BLS Handbook of Methods, Bulletin 2285, 1988, p. 155; BLS Handbook
of Methods, Bulletin 2414, 1992, p. 177; BLS Handbook of Methods, Bulletin
2490, 1997, p. 170.
5 An alternative would be to formulate the cost-of-living
index in terms of required income rather than required expenditure. This formulation would
imply the inclusion of income- and wage-based taxes. See, for example, Robert A. Pollak,
"The Treatment of Taxes in the Consumer Price Index," in The Theory of the
Cost-of-Living Index (New York, Oxford University Press, 1989), pp. 193-199, and
Robert Gillingham and John S. Greenlees, "The Impact of Direct Taxes on the Cost of
Living," Journal of Political Economy, 95, no. 4, August 1987, pp. 775-796.
6 See Pollak, Theory of the Cost-of-Living Index, and
Gillingham, "A Conceptual Framework."
7 The BLS has elsewhere (see, for example, Abraham et al,
"Working to Improve the Consumer Price Index") made this point in the context of
adjusting for new product innovations.
8 See W. E. Diewert, "Exact and Superlative Index
Numbers," in Diewert and Nakamura, eds., Essays in Index Number Theory, Volume
1, pp. 223-252.
9 Whereas the BLS collects and processes CPI price data
monthly, most CPI expenditure data are drawn from the Consumer Expenditure Survey (CEX)
household interviews, which are conducted quarterly. Fully edited expenditure data for a
given year are not available until late in the following year. As is described below, the
BLS plans to take steps to expedite the processing of the CEX data, but updating of
expenditure weights on a monthly basis would be prohibitively expensive.
10 U.S. Senate, Committee on Finance, Final Report,
11 See Ana M. Aizcorbe, Robert A. Cage, and Patrick C.
Jackman, "Commodity Substitution Bias in Laspeyres Indexes: Analysis Using CPI Source
Data for 1982-1994," paper presented at the Western Economic Association
International Conference in San Francisco, July 1996 (Washington, D.C., Bureau of Labor
Statistics); and Matthew D. Shapiro and David W. Wilcox, "Alternative Strategies for
Aggregating Prices in the CPI," Federal Reserve Bank of St. Louis Review,
May/June 1997, pp. 113-125.
12 See Shapiro and Wilcox, "Alternative
Strategies." The CES formula that they proposed was originally derived by P.J. Lloyd,
"Substitution Effects and Biases in Nontrue Price Indices," American Economic
Review, vol. 65, June 1975, 301-13, and was suggested by BLS staff as a method for
approximating a superlative index without current expenditure data.
13 In his April 29, 1998 testimony before the Human
Resources Subcommittee, Robert Gordon, a member of the advisory commission, indicated that
the commission members were "supportive to the factors that the BLS cited" in
retaining the current formula for some strata.
14 Michael J. Boskin, Ellen R. Dulberger, Robert J. Gordon,
Zvi Griliches, and Dale W. Jorgenson, "Consumer Prices, The Consumer Price Index, and
The Cost of Living," Journal of Economic Perspectives, vol. 12, Winter 1998,
15 See S.G. Leaver, W.H. Johnson, R.M. Baskin, S. Scarlett,
and R. Morse, "Commodities and Services Sample Redesign for the 1998 Consumer Price
Index Revision," Proceedings of the Survey Research Methods Section, American
Statistical Association, 1996, pp. 239-244.
16 U.S. Senate, Committee on Finance, Final Report,
17 See Ralph Bradley, Bill Cook, Sylvia G. Leaver, and
Brent R. Moulton, "An Overview of Research on Potential Uses of Scanner Data in the
U.S. CPI," paper presented at the Third Meeting of the International Working Group on
Price Indices, Voorburg, Netherlands, April 16-18, 1997 (Washington, D.C., Bureau of Labor
18 See Walter Lane, "Changing the Item Structure of
the Consumer Price Index," Monthly Labor Review vol. 119 no. 12, December
1996, 18-25 for a discussion of the design of the item structure.
19 Lane, "Changing the Item Structure," p. 22.
20 See U.S. Senate, Committee on Finance, Final Report,
21 The January 1997 consolidation of three CPI
stratahospital room, other inpatient services, and outpatient servicesinto one
hospital services stratum was designed in part to capture substitution among those three
settings for treatment provision. The inclusion of new cars and new trucks in a single new
vehicles stratum is an example of a similar change taking place as part of the January
1998 introduction of the revised CPI market basket.
22 See "Changing the CPI Homeownership Method to
Rental Equivalence," CPI Detailed Report, Bureau of Labor Statistics, January
1983, pp. 3-17.
23 Automobile and tenants insurance policies are priced
directly in the CPI.
24 For discussions of past BLS research on the direct
pricing of health insurance policies, and on the user-cost and leasing-equivalence
approaches to pricing of automobile services, see Paul A. Armknecht and Daniel H.
Ginsburg, "Improvements in Measuring Price Changes in Consumer Services: Past,
Present, and Future," in Zvi Griliches, ed., Output Measurement in the Service
Sectors, (Chicago, University of Chicago Press, 1992).
25 See, e.g., Pollak, Theory of the Cost-of-Living Index;
and David M. Cutler, Mark McClellan, Joseph P. Newhouse, and Dahlia Remler, "Are
Medical Prices Declining?" National Bureau of Economic Research, Working Paper Number
5750, September 1996.
26 U.S. Senate, Committee on Finance, Final Report,
27 The commissions discussion of the appearance of
AIDS, however, suggests agreement with the idea that not all changes in the quality of
life ought to be reflected in the CPI (U.S. Senate, Committee on Finance, Final Report,
28 See Jack E. Triplett, "Concepts of Quality in Input
and Output Price Measures: A Resolution of the User ValueResource Cost Debate,"
in Murray F. Foss, ed., The U.S. National Income and Product Accounts: Selected Topics
(Chicago, University of Chicago Press, 1983).
29 For discussion of the quality adjustment methods used by
the BLS, see Armknecht, Lane, and Stewart, "New Products and the U.S. CPI";
Marshall Reinsdorf, Paul Liegey, and Kenneth Stewart, "New Ways of Handling Quality
Change in the U.S. Consumer Price Index," Working Paper No. 276, Bureau of Labor
Statistics, 1996 and Moulton and Moses, "Addressing the Quality Change Issue."
30 Moulton and Moses, "Addressing the Quality Change
Issue," Table 4.
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