How Much Does Formula vs. Chaining Matter for a Cost‐of‐Living Index? The CPI‐U vs. the C‐CPI‐U

Gregory Kurtzon

Abstract

A large economics literature has debated the best formula to estimate a cost-of-living index (COLI) - this study shows that formula may not be relevant for many purposes for an index chained at a monthly frequency if current weight information is properly used. The large majority of the difference between the levels of the CPI-U and the generally lower C-CPI- U (a COLI) is due to the CPI-U weights holding quantities constant over long periods, rather than the difference in formula assumptions. A new method to avoid chain drift with long term price relatives is developed to effectively approximate a COLI.