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  3. Journal of Economic Literature
  4. March 2003
  5. Measurement Error in the Consumer Price Index: Where Do We Stand?

Measurement Error in the Consumer Price Index: Where Do We Stand?

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Abstract

We survey the evidence on CPI bias and provide our best estimate of its magnitude. We also identify a "weighting" bias that has not been quantified previously. We estimate that the CPI currently overstates the rate of change in the cost of living by about 0.9 percentage point per year, with a confidence interval ranging from 0.3 to 1.4 percentage points. Our estimate is boosted by new evidence that substitution bias has increased sharply since the mid-1990s, and is reduced by the cumulative impact of a variety of recent improvements to BLS procedures. The study discusses potential areas for further improvement.

Citation

Lebow, David, E., and Jeremy B. Rudd. 2003. "Measurement Error in the Consumer Price Index: Where Do We Stand? ." Journal of Economic Literature, 41 (1): 159-201. DOI: 10.1257/002205103321544729

JEL Classification

  • C43 Index Numbers and Aggregation; Leading indicators
  • E31 Price Level; Inflation; Deflation