bought by others. The first two conditions almost certainly occur most of the time; there is little evidence about the third.

THE CONSEQUENCES OF HETEROGENEITY FOR INDEX CONSTRUCTION

If inflation rates differ among people—occasionally or frequently—an overall national index, however averaged over the population, could misstate the rate of inflation for the poor, the elderly, other demographic groups, or people living in different regions of the country. An important aspect of public dialogue about national policy revolves around the changing economic fortunes of different income, age, and racial groups and different regions of the country. We typically measure these fortunes by adjusting changes in nominal incomes or consumption expenditures by a single national index of inflation, which is fine if group differences in inflation are small but misleading if they are not. Even more importantly, if inflation rates differ significantly among groups, the use of an overall CPI to index social security pensions, other public benefits, and the income tax system may overcompensate some groups in the population and undercompensate others in ways that most people would deem unfair or unjust.

As a first step to address the issue, one would like to know the extent to which, in the past, a single national index would have been a reasonably close measure of inflation rates for different groups, and how often and under what economic conditions inflation rates for one or more groups differed significantly from the overall index. While the past need not repeat itself, this kind of information would certainly be valuable for making a reasoned judgment about whether a single national index is sufficient for the major uses to which it is put or whether it needs to be supplemented with one or more indexes representing the different experiences of particular groups within the population. Unfortunately, the current data collection system underlying the CPI is generated is such a way that it is impossible to produce indexes for subgroups in the population that capture the heterogeneity in the qualities of goods purchased and the prices paid among those subgroups.

GROUP INDEXES: WHY THE CURRENT DATA COLLECTION SYSTEM CANNOT PRODUCE THEM

Chapter 1 describes how BLS produces the CPI in two stages. At the first stage, known as the lower level, BLS collects data on monthly price changes for individual items—not from individual households, but from a sample of retail outlets throughout the nation. It groups those items into some 218 categories or strata.1 Within each stratum, BLS combines into a single-stratum index the

1  

Data on housing rents are collected in a special survey.



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