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BPEA Article

Addressing the Quality Change Issue in the Consumer Price Index



THE FINAL REPORT of the Advisory Commission to Study the Consumer Price Index (CPI) represents the most influential critique of the CPI in decades. This report, in conjunction with a number of other reviews of CPI bias, has focused the attention of policymakers and economists on the limitations of price index numbers, in particular, and of other measures of economic activity, more generally. The commission's estimate of overall bias in the CPI is 1.1 percent per year, of which 0.4 percent is attributed to the failure of the fixed weight index to account for consumer substitution as relative prices change, 0.1 percent is attributed to failure to account for discount stores and other innovations in retailing, and 0.6 percent is attributed to inadequate measurement of improvements in quality and of new goods. In contrast to the commission's estimates of substitution bias, which have been relatively uncontroversial, the estimates of quality and new goods bias have been criticized by several economists.



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