struction of national and regional indexes to the consumption patterns and prices paid by the rich than to those of the poor.
The alternative approach, for which it would be much more difficult to collect the necessary data, is a democratic index: Under this approach, we would construct individual price (or cost-of-living) indexes for a representative sample of the whole population and then average them, assigning the same weight to each person, regardless of the magnitude of their total consumption expenditures. Which kind of index is appropriate for each of the major purposes that the CPI serve? And, in practice, how would one construct the democratic counterpart of the current plutocratic CPI? Such questions arise in much the same form whether one is working with fixed-basket or cost-of-living indexes.
This chapter pays particular attention to the fact that the data collection system underlying the CPI, and those employed to produce price indexes in other countries, cannot now provide important elements of the information needed to explore consequences of consumer heterogeneity and, specifically, to determine whether inflation rates do in fact differ among various groups within the population. As we pointed out in the introductory chapter, the key constraint is that information about consumers and how they budget their income is collected from a household survey, while price information is collected from retail stores; thus we cannot link the characteristics of purchasers with the prices they pay. This chapter outlines the kind of surveys that would be needed to collect price data directly from households. It explains why, using current survey techniques, acquiring such information would be extremely expensive and perhaps impossible. It suggests research options for exploring the feasibility and costs of alternative and more technologically intensive survey methods that might help solve this problem and, in the process, produce information about the inflation experience of particular groups such as the poor or the elderly.
From the standpoint of constructing a price index, heterogeneity shows up at two stages of the process. First, people allocate their consumption budgets differently across categories of goods such as food, shelter, entertainment, and travel. Some of these differences are idiosyncratic among individuals—vegetarians and meat eaters, book lovers and sports enthusiasts, travelers and homebodies. But many of the differences are systematically related to the economic, demographic, and locational characteristics of households. The poor spend a higher fraction of their income on food and clothing than do the rich and a smaller fraction on travel and entertainment. The elderly tend to devote a smaller fraction of their budgets to durable goods and clothing and a larger fraction to travel and medical care than do non-elderly. People who live in the South spend less on heating fuel and more on air conditioning than those in the North. As we explained earlier, the Bureau of Labor Statistics (BLS) distinguishes some 218 different strata or categories of