opportunity afforded by introduction of a new model to piggyback price increases (U.S. General Accounting Office, 1999:77). The class-mean method was developed and instituted by BLS to address the problem posed by this pattern. Like deletion, the class-mean method is used to impute the price of a changed item, but it does so from a set of similar goods further limited to those (1) classified as comparable replacements or (2) that could be explicitly quality adjusted by a hedonic or direct cost method. The underlying assumption is that price inflation is different for items that undergo replacement than it is for models that do not change. Looking at this restricted class of goods allows the price trend of a replacement item to be imputed from price quotes observed for other models that have turned over; but by limiting the set to items deemed comparable, it is hoped that quality-related elements are not a major factor. The method has been used in the new cars index since 1989 (Moulton and Moses, 1997:327).13

Assessment of Views on Within-Sample Quality Adjustment

As noted above, the Boskin commission report did not seek to identify bias specifically associated with CPI procedures for handling quality change. This was largely a by-product of the commission’s decision to estimate new goods and quality change bias together, by CPI category, using independent evidence on quality-adjusted price changes. The work by Triplett (1997) and by Moulton and Moses (1997) indicates that full assessment of quality change should also include an examination of potential biases associated with BLS adjustment procedures. Summarizing the impact of quality adjustments applied by BLS item replacement methods, Moulton and Moses (1997:348-349) conclude:

For certain important categories of items considered by the Advisory [Boskin] Commission, it would be difficult to argue that the CPI does not overstate the rate of price change. In other cases, however, any bias seems likely to be considerably smaller than the advisory board has estimated and, in certain cases, it could even be negative. . . . Our measurements of quality effects . . . show that any quality bias could go in either direction, either through inadequate quality adjustment (as emphasized by the advisory commission) or through excessive quality adjustment by the application of the link method to items with rising prices.

In addition, Moulton and Moses demonstrate that quality adjustments by the BLS do have a significant effect on measured price change. Examination of BLS methods calls into question the Boskin commission’s view that price growth associated specifically with CPI sample items is biased upward.

The debate over the extent to which the treatment of quality improvements produces upward bias in the CPI has been, to a substantial degree, a conflict

13  

We discuss the class-mean method in more detail in the section on hedonics (since class mean is usually what hedonic methods have replaced).



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement