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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
particular purpose, and practical considerations limit the number of indexes that can or should be produced. Chapter 7 evaluates the extent to which the CPI and existing or proposed supplemental indexes meet the needs of various users.
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. Any divergence between that estimate and the superlative that appears 2 years later could be incorporated as a correction to the cost-of-living allowance provided for that year. (Conclusion 7-1)
A related question is whether social security cost-of-living allowances (COLAs) should be based on a special index for the elderly. Using data from the last several decades, BLS has produced a special index for the elderly (CPI-E) by weighting the price indexes for various categories of goods according to the purchasing patterns of the elderly rather than the general population. This index did not rise at a significantly different rate than the overall CPI. Different groups not only have different overall consumption patterns but face different prices and buy different qualities of goods; the BLS has called attention to this limitation of its experimental index. In the absence of an index that can capture these differences, we see no rationale for basing social security COLAs on the type of indexes constructed in the BLS studies. But the CPI-E should be periodically updated to make sure that no significant differences with the CPI have developed.
Adjusting social security benefits for retirees with a wage index would be an alternative to CPI indexation. The panel was not charged to make recommendations on this issue, but we do spell out the implications of this and other indexing methods for public policy.
The data inputs used to calculate the CPI subindexes originate from several sample-based sources, most notably the Consumer Expenditure Survey (CEX), the Point of Purchase Survey (POPS), the Commodities and Services Survey, and the CPI Housing Survey. The panel considered two distinct approaches for upgrading this apparatus. One is to assume that the basic data collection structure will remain as is and then to seek ways of improving each of the survey components. Another is to redesign, from scratch, the entire data collection structure so that it reflects advances in data collection technology and so that the data collected are more consonant with the ultimate computation of the CPI.
The panel’s foremost concern with the CEX, which is the primary tool for establishing CPI weights at the basic item level, is the extent of biases in house-