Conclusions and Recommendations

BLS treatment of items that enter the CPI through outlet rotation is conceptually parallel to its treatment of items that replace disappearing ones (except that, for outlet substitution, overlap pricing can nearly always be used to impute price change for the transition month). In the case of new outlets, the continuing (for now) shift of purchases toward large discounters suggests that the price differences are not, on average, proportional to perceived quality variation of shopping experiences.

On the assumption that the COGI concept does not call for fixed “weights” among types of outlets then, under either a COGI or a COLI approach, an explicit decision is needed about how to make item price quotes comparable as new outlets replace old ones in the CPI sample. For the foreseeable future, the BLS will not have the tools to explicitly adjust observed prices to account for changing outlet quality characteristics. Thus, the range of short-term recommendations from which the panel may select is limited. BLS could:

  • continue the current treatment of outlet replacement—in which case all of any price difference for a specific item from one outlet to another is assumed to be equal to the difference in the quality of the shopping experience;

  • treat the price difference as a “true” price change—in which case zero net quality difference is assumed to exist between outlet types—though this is a poor option because prices at the newly selected outlet were, in most cases, lower before it was rotated into the sample, so even if a (quality-adjusted) price decrease took place, the timing of its inclusion into the index would be wrong; or

  • split the difference—as recommended by the Conference Board, but there is little reason to believe that splitting the difference is more accurate than the results of the current practice (and such a recommendation might be faulted for creating the precedent of solving a difficult problem without quantitative evidence).

Conclusion 5-2: Given the available options and given that current techniques cannot consistently and accurately separate quality and price effects associated with the value of retail service, BLS has little choice but to continue its current practice.

However, in principle, when outlet rotation results in a change in the observed price of an identical product, an attempt should be made to decompose the difference into quality (or convenience) and pure price components, instead of attributing it, in its entirety, only to the former.

Recommendation 5-2: With longer-term modifications in mind, the panel recommends pursuing research into price variation across outlets with differing characteristics.

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