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Office of Survey Methods Research
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Published Year: 2017
Survey/Program(s): Office of Prices and Living Conditions
Catalog: Economic Working Paper
WP Number: WP-498
Publication Status / Disposition: See Economic Inquiry, Vol. 60, Issue 2, April 2022, pp. 645-667.
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How Much Does Formula vs. Chaining Matter for a Cost‐of‐Living Index? The CPI‐U vs. the C‐CPI‐U
Abstract
A large economics literature has debated the best formula to estimate a cost-of-living index (COLI). This study shows that formula does not matter for many purposes for an index chained at a monthly frequency once chain drift has been removed. Spurious chain drift is removed with a new method revealing the large majority of the difference between the CPI-U and the C-CPI-U (a COLI) is due to the CPI-U weights effectively chaining at the biennial frequency, rather than the difference in formula assumptions. This sufficiently justifies the C-CPI-U and similar chained indexes while also showing their assumptions are not critical.