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To Modernize the Consumer Price Index, BLS Should Accelerate Use of New Data Sources and Provide Price Indexes for Different Incomes, Says New Report (News Release)

The Bureau of Labor Statistics (BLS) should undertake a new strategy to modernize the Consumer Price Index by accelerating its use of new data sources and developing price indexes based on different income levels, says a new report from the National Academies of Sciences, Engineering, and Medicine.

The Consumer Price Index is the most widely used measure of inflation in the U.S. It is used to determine cost-of-living allowances and, importantly, influences monetary policy, among many other private- and public-sector applications. The new report, Modernizing the Consumer Price Index for the 21st Century, says the index has traditionally relied on field-generated data, such as prices observed in person at grocery stores or major retailers. These data have become more challenging and expensive to collect, and the availability of vast digital sources of consumer price data presents an opportunity. BLS has begun tapping into these data and has said its objective is to switch a significant portion of its measurement to nontraditional and digital data sources by 2024.

“The enormous economic disruption of the COVID-19 pandemic presents a perfect case study for the need to rapidly employ new data sources for the Consumer Price Index,” said Daniel E. Sichel, professor of economics at Wellesley College, and chair of the committee that wrote the report. “Modernizing the Consumer Price Index can help our measurement of household costs and inflation be more accurate, timelier, and ultimately more useful for policymakers responding to rapidly changing economic conditions.”

The report says BLS should embark on a strategy of accelerating and enhancing the use of scanner, web-scraped, and digital data directly from retailers in compiling the Consumer Price Index. Scanner data — recorded at the point of sale or by consumers in their homes — can expand the variety of products represented in the Consumer Price Index, and better detect shifts in buying patterns. Web-scraped data can more nimbly track the prices of online goods, and goods where one company dominates the market. Permanently automating web-scraping of price data should be a high priority for the Consumer Price Index program, especially for food, electronics, and apparel, the report says.

Embracing these alternative data sources now will ensure that the accuracy and timeliness of the Consumer Price Index will not be compromised in the future, the report adds. Moreover, accelerating this process will give BLS time to carefully assess new data sources and methodologies before taking the decision to incorporate them in the official index.

The report also recommends strategies for BLS to more accurately estimate the composition of households’ expenditures — also known as market basket shares or weights — by updating this information more frequently and using innovative survey techniques and alternative data sources where possible.

Because of the urgency of issues related to income and wealth inequality, developing price indexes specific to different income groups should be a high priority for BLS, the report says. The bureau should identify data sources that would allow it to estimate price indexes defined by income quintile or decile — 20 percent or 10 percent increments. The report says BLS will have to be creative and flexible in finding and blending different data sources to achieve this goal.

The report also provides recommendations for improving the Consumer Price Index’s estimation of changes in the cost of housing and in medical care prices, two consumer expenditure categories that are traditionally difficult to measure. BLS should continue to estimate the cost of housing for owners by establishing rental equivalents, but it should also look for new data sources — such as property tax data — to capture more accurate and detailed information about the sometimes rapid changes in rental prices.

BLS should continue using its current method of estimating changes in the cost of health insurance, in which it blends the price of medical care services with retained earnings data from insurance providers, but it should also consider improvements to this method. BLS should begin using price data from large companies that self-insure to provide health insurance to employees, and continue evaluating how to use claims data, hospital price data to track medical care services, and drug prices paid by consumers with improved detail and timeliness.

BLS should designate a single person at the deputy commissioner level to lead data transformation efforts, the report recommends. This position would focus on data acquisition, and serve as a point person for coordination among other U.S. statistical agencies also implementing data modernization initiatives. The report notes that legal constraints, high costs, and privacy concerns have all slowed the incorporation of commercial and private data into federal statistics, and more extensive coordination between agencies could advance BLS’ access to these data sources.

In addition, BLS should collaborate with statistical agencies outside the U.S. to better understand their data transformation efforts and experiences, and enhance interactions with outside experts to leverage the latest advances in price measurement research. The report also recommends that BLS strive to build the staff needed to undertake these efforts and to develop its in-house talent by rewarding employees who pursue technical expertise in data science.

The agency should aggressively and frequently communicate changes to how the Consumer Price Index is formulated to both user and research communities — such as by posting advance notice of changes or updates on project timelines in an easy-to-find location on its website.

The study — undertaken by the Panel on Improving Cost-of-Living Indexes and Consumer Inflation Statistics in the Digital Age — was sponsored by the Bureau of Labor Statistics, U.S. Department of Labor.

Press release: https://www.nationalacademies.org/news/2022/05/to-modernize-the-consumer-price-index-bls-should-accelerate-use-of-new-data-sources-and-provide-price-indexes-for-different-incomes-says-new-report
Modernizing the Consumer Price Index for the 21st Century: https://nap.nationalacademies.org/catalog/26485/modernizing-the-consumer-price-index-for-the-21st-century
CNSTAT Panel on Improving Cost-of-Living Indexes and Consumer Inflation Statistics in the Digital Age: https://www.nationalacademies.org/our-work/improving-cost-of-living-indexes-and-consumer-inflation-statistics-in-the-digital-age

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