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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
studies covering earlier periods found little difference in the cost-of-living changes faced by the elderly and the general population (see Boskin and Hurd, 1985; Jorgenson and Slesnick, 1983).
These results however do not necessarily mean that the elderly faced only slightly more rapid increases in living costs than the population as a whole during those years. Then, or at other times, the “true” differences could be larger and might be either positive or negative. In the BLS studies, for example, the heavier weight attached to out-of-pocket medical care expenses among the elderly accounts for the majority of the difference between the CPI-E and the CPI-U or CPI-W. It is widely believed that, quite apart from controversial issues of quality adjustment, the measurement of medical care prices in the CPI during the periods studied overstated their rise (Newhouse, 2001). BLS has recently improved the definition of the medical care services it prices, and a recent study has shown that changes of this nature significantly reduce the rise of medical care prices (Newhouse, 2001). In addition, the CPI-E did not capture any possible influence coming from changes in the magnitude and scope of senior citizen discounts.
The major problem, however, lies in the fact that the elderly may, on average, buy different varieties of goods within many CPI strata, face different prices, and shop at different outlets than younger consumers. Unfortunately, as we explain in Chapter 8, there is no database that allows adequate exploration of this facet of behavior and its consequences, for the elderly as well as for the poor or other demographic groups. The special CPI-E index and the other studies cited all used the same prices for the same goods at the same outlets as were priced for the CPI-U and simply reweighted them to reflect the budget allocations of the elderly among large expenditure categories. That is one of the reasons we recommend a long-range BLS research program that would explore the use of innovative techniques (e.g., scanner technology integrated with consumer surveys) to examine this issue.
Conclusion 7-4: In the absence of an index that can capture the differences in the prices or qualities of goods purchased by the elderly, we see no rationale for switching to an index along the lines of the CPI-E for purposes of indexation. However, BLS should periodically update the CPI-E to make sure that significant differences are not developing between it and the CPI-W and the CPI-U.
The CPI-U Versus the CPI-W for Indexing Transfer Payments
In 1978 the CPI was revised in a major way, including an expansion of its coverage from “urban wage earners and clerical workers” (one-third of the population) to “all urban consumers” (four-fifths of the population). The new index was christened the CPI-U, which is now widely accepted as the main or flagship index of consumer prices. The original CPI was renamed the CPI-W and contin-