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The Problem with Normalizing Preferences that Change in a Cost-of-Living Index

Gregory Kurtzon


There are new proposals for prices indexes that attempt to correct for what they consider bias in standard indexes from changes in consumer preferences. But these proposals have a fundamental problem that changes in preferences between two periods cannot be identi.ed by data on prices and quantities with only a normalization. This paper shows that the required normalization is not free, so that an arbitrary choice of normalization can yield any desired index result. In fact, a normalization using the Sato-Vartia weights yields a Sato-Vartia index, implying exactly zero bias.