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, p. 50.

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, p. 14.

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, p. 51.

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 Statistics).

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, p. 52.

21 The January 1997 consolidation of three CPI strata—hospital room, other inpatient services, and outpatient services—into 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, p. 30.

27 The commission’s 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, p. 47).

28 See Jack E. Triplett, "Concepts of Quality in Input and Output Price Measures: A Resolution of the User Value–Resource 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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