At What Price? Conceptualizing and Measuring Cost-of-Living and Price Indexes (2002) / Chapter Skim
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Executive Summary
Executive Summary
Pages 1-12
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From page 1... ...
undertake research to move the CPI closer toward a cost-of-living index. The subject was given new public prominence in the l990s by increasing congressional concerns over the budget and the role of the CPI in determining social security cost-of-living allowances and tax indexation.
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From page 2... ...
The concept of the COLI explicitly takes into account the effect of this substitution behavior in reducing the expenditure required by a consumer to maintain a given standard of living when prices change. Probably the single most difficult and important task in index construction is dealing with the ongoing flow of quality changes among consumer goods and services.
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From page 3... ...
All panel members find it difficult to think about the definition of goods and about quality change without considering what it is that consumers value, and agree that it is impossible to think about substitution behavior without the concept of a constant standard of living which allows price changes to be converted into a monetary equivalent. For all these issues, especially the last, the cost-of-living framework is central.
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From page 4... ...
This fact gives rise to two kinds of issues: First, for such purposes as adjusting social security payments and the tax system, and for measuring changes in real income, when can one aggregate the data for the whole population into a single official price index; when are different price indexes needed for specific population subgroups; and how can the data needed to produce such subgroup indexes be collected? Second, when a single overall index is produced, how should the costs of living of individual households be combined into a single national index?
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From page 5... ...
(Recommendation 8-1) ACCOUNTING FOR SUBSTITUTION BEHAVIOR When prices change, consumers tend to shift their purchases toward those goods and services whose relative prices have decreased, thereby reducing any adverse consequences of the price changes on their costs of living.
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From page 6... ...
The BLS must continually make judgments about how much of a price difference represents "pure" price change and how much represents a quality difference. Increasingly, BLS has been turning to explicit quality adjustment techniques, principally hedonics, in which statistical regressions are used to assign monetary values to differences in the particular characteristics of a type of product and to adjust its reported prices accordingly when the characteristics of the good change.
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From page 7... ...
To assist in this task, we recommend the following: An independent advisory panel, consisting of econometricians, statisticians, index experts, marketing specialists, and possibly product engineers should be formed to provide guidance on both conceptual and application issues pertaining to hedonic methods. (Recommendation 4-8)
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From page 8... ...
Currently the underlying conceptual apparatus of the CPI assumes that when lower-price outlets enter the sample, there is no net price reduction, because all of the price difference between the old and the new outlet reflects a difference in the quality of service. Because current techniques cannot consistently and accurately separate quality changes from the price effects associated with the value of retail service, BLS
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From page 9... ...
Because of the complicated institutional setting in which medical care services are provided and financed, together with the rapid pace of development of new medical technologies, their appropriate pricing probably constitutes the most difficult single task in producing the CPI. The panel makes a number of recommendations in this area: BLS should select between about 15 to 40 diagnoses from the ICD (International Classification of Diseases)
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From page 10... ...
BLS should include the portion of health insurance paid for by employers in one version of the CPI, perhaps calling it an "expanded-scope medical CPI." Because many commonly used income measures exclude employer-provided benefits, and because the Consumer Expenditure Survey is based only on out-of-pocket expenditures, the original conception of the MCPI domain should still be maintained in constructing the traditional (flagship)
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From page 11... ...
The panel concludes that a superlative index is appropriate for adjusting benefits to keep pace with the cost of living. In this context, the panel suggests the following: It would be feasible and appropriate to calculate cost-of-living allowances provided for social security and other programs from an advance estimate of the BLS published superlative index.
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From page 12... ...
In considering alternative data collection approaches, the panel suggests that BLS (1) investigate the possibility of combining the POPS and CEX into an integrated survey that obtains expenditure and outlet-use data at detailed product levels, along with household demographic information needed for subgroup indexes and (2)
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