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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
niques that we recommend (see Chapter 8) ultimately leads to the production of democratically weighted CPI indexes at the lower (strata) level, it will be necessary to retain a parallel system of expenditure-weighted individual strata indexes for use in the NIPA.
Since the detailed components of the CPI are the building blocks of the NIPA as output deflators and inflation measures for consumer goods, which make up two-thirds of GDP, decisions about conceptual and measurement issues in its construction will not only determine what is known about the rate of inflation but will also strongly influence information about the rate at which the U.S. economy grows and the nature of its structural changes over time.
The most important issues in this regard are decisions about how to deal with quality change and the introduction of new goods. One would surely, for example, not consider it inflationary (and thus calling for restrictive monetary policies) if households consumed a large fraction of their growing real incomes upgrading the quality of autos, housing services, and other goods and, in the process, paid higher nominal prices. But the quality issue is not only a matter of doing a better job of capturing product improvements. Some analysts have argued, and provided indirect evidence, that sellers often use the occasion of changes in models and styles to raise prices. As a consequence, the current BLS procedures for pricing the new models may attribute too much of that markup to quality change and too little to “pure” price change (see Chapter 5).
For purposes of well-informed macroeconomic policy making, measures of national inflation, and corresponding measures of national output, ought to incorporate the prices and output of new goods as soon as practicable and also reflect changes in the quality of goods and services to the extent that they can be reliably measured, subject to the conceptual limitations discussed in Chapters 2 and 5. Pursuit of this objective must fully recognize the difficult problems that surround the use of statistical estimation techniques to produce measures of quality change and observe the cautions we express in Chapter 4 about introducing quality adjustments into the index before sufficient preparatory research is done. These difficulties underline the potential value of a continuing research and operational effort directed toward further improving and monitoring the ability of the BLS to deal with changes in quality, the timely introduction of new goods, and related issues.
INFLATION INDICATORS FOR MACROECONOMIC POLICY
The central reason that inflation of any significant magnitude is considered undesirable and economically destructive is that it creates obstacles and uncertainties for business firms and individuals in planning and making commitments for the future. In theory, if the rate of future inflation were known with certainty, then with minor inconvenience one could operate with equal efficiency under a high or a low rate of inflation. But the future rate of inflation is never known with