tered; Armknecht et al. (1997) indicate that existing CPI procedures can accommodate these situations. However, “because of the time lapse associated with the CEX and TPOPS surveys, unless special efforts are made to reinitiate an item stratum, three to four years elapse from the time the product appears in the marketplace to the time the product appears in the CPI” (Armknecht et al., 1997:387). BLS accounts of the 1998 revised CPI methodology, however, suggest that the new ELI structure and the change to category rotation under TPOPS will provide more sampling flexibility and bring new items more quickly into the index (see Greenlees and Mason, 1996).

If costs linked to these processes were not a consideration, the panel would likely agree, without qualification, with the Conference Board’s suggestion that sample rotation schedules should be further sped up for most goods. Cost is a big factor though and, given current evidence, it not clear that a 2-year rotation plan would yield commensurate benefits in terms of index accuracy.

Recommendation 5-1: Until it can be shown that further compression of the sample rotation schedule would create significantly different rates of change in the CPI, the panel is satisfied with the current BLS plans. We do recommend that BLS undertake research designed to assess the impact that moving from a 4-year to a 2-year rotation cycle would have on the rate of index growth.

This will entail analyzing a broad set of items to simulate the effect that more frequent rotation would have. BLS should specifically investigate the statistical disadvantages of frequent sample rotation. New samples enter the CPI by chaining, and these transient disturbances can cause an index to display higher variances and a tendency to drift upward. Only after these issues are given further attention can recommendations regarding the optimal sample rotation frequency be advanced in a fully informed manner.

As noted above, BLS must also deal with the class of product introductions that are not picked up during normal sample rotation. If a new item is encountered that does not fit an existing ELI definition and is not obviously a close substitute for one that does but does fit within an existing item stratum, the remedy is to define a new ELI. “This process could take five to seven years for full implementation” through the normal sample rotation process (Armknecht et al., 1997:387).

If a new item does not fit any existing item stratum definition (e.g., cell phones, VCRs), it normally does not enter the CPI until item strata are redefined. Until recently, this happened only when major revisions of the CPI were introduced—about every 10 years.13 Historically, the more novel a new item, the




BLS (Greenlees and Mason, 1996:3, 4) explains that the “the most fundamental and visible activity in each of these CPI revisions is the introduction of a new “market basket,” or set ofexpenditure weights attached to the categories of goods and services comprising the CPI.” The year of a revision is identified when the new market basket introduction occurs—as such, the most recent “major revision” is usually identified as the 1998 CPI revision. The authors add:

The projects and changes encompassed in the current [1998] revision—the sixth major revision in the CPI’s history—range from the reselection and reclassification of areas, items, and outlets, to the development of new systems for data collection and processing. . . . It is important to note, however, that numerous methodological improvements in the CPI have taken place outside the revision framework. Among the most prominent examples of these are the annual adjustment for changes in the quality of new cars after model changeovers were introduced in 1967, the shift to flow-of-services measures of the cost of owner-occupied housing in the early 1980s, and the implementation of regression-based methods for quality adjustment of apparel prices starting in 1991.

See Greenlees and Mason (1996) for a full itemization of methodological changes associated with both major and interim CPI revisions.

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