TABLE 4-1 CPI Item Replacement Methods and Use Rates, 1995

Method

Percentage of Price Quotes for Replacement Items Using Method

Percentage CPI Change Attributable to Replacement Items, Decomposed by Methoda

Item Categories for Which Frequently Applied

Direct comparisonb

65

60

All categories

Overlap pricing

1

10

Apparel, medical care

Deletionc

15

2

Medical care, food and beverages

Class-mean

8

18

Apparel, transportation

Direct quality adjustmentd

11

19

Transportation, apparel, computers

aThe percentage change in CPI item categories affected by item replacement was 2.16 in 1995. Of this, 1.09 percent was attributable to replacement items (leaving 1.07 attributable to continuously priced items). Thus, for instance, 0.6 * 1.09 gives the overall percent change in the CPI that could be attributed to direct comparison price quotes in 1995.

bUsed for comparable replacements; the rest of the methods listed are applied to noncomparable replacements.

cThis follows Triplett’s terminology; it is typically called the link method in BLS literature.

dThis category includes both cost-based and hedonic methods.

SOURCE: Data from Moulton and Moses (1997).

undergo steady improvement, and often a better model is introduced with no change in price, causing the quality change to be missed entirely” (Boskin et al., 1996:19).9 Empirical evidence presented by Moulton and Moses (1997) implies that any upward bias from ignoring quality change under the comparable substitution method is small, tempering the Boskin commission view. Triplett (1997:26) synthesized the empirical evidence: “Note . . . that the average price change [shown using 1995 CPI data] for the direct comparison cases (2.51 percent) is not higher than the quality-adjusted price changes for CPI cases where a direct quality adjustment is made (2.66 percent—Table 7). This suggests that the upward bias from ignoring quality in the direct comparison cases is small.” Triplett goes on to explain why this is likely to be the case: “Direct comparison is the sanctioned [here used to mean approved] method for cases where the quality difference between varieties a and b is small, so it is reasonable that the quality errors are also small (though they might be pervasive).”

9  

The Boskin commission is really criticizing the BLS method for assessing comparability. Under the comparable replacement procedure, the new price is recorded, and the bias will be the same (in absolute terms) whether or not price a change has occurred.



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