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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
index for the elderly would have to be constructed to reflect “items that are purchased” and “prices actually paid.” By comparing such an index with one constructed by applying CPI strata prices to the expenditure pattern of the elderly, one could see whether, given the behavior of prices in a particular historical period, it would have been different.
THE CONCEPTUAL BASIS FOR GROUP INDEXES
One approach to the problem of how to aggregate across heterogeneous individuals starts from the concept that there exists a cost-of-goods index (COGI) and a COLI for each household, based on the prices it pays and the quantities of each good it buys. In a footnote at the beginning of its report, the Boskin commission wrote (Boskin et al., 1996:5): “In principle, if not in practice, a separate cost of living index could be developed for each and every household based on their actual consumption basket and prices paid.” Those individual indexes could be combined or averaged into many possible combinations—a single national average for all households and separate indexes for various population subgroups and geographic areas. To produce an overall national index, the indexes for the individual households could be averaged, giving equal importance to each (a democratic index) or be weighted in accordance with each household’s total expenditures on consumer goods (a plutocratic index).
Currently, BLS collects monthly price data from retail outlets and other sellers and combines them with information on consumer expenditure patterns derived from separate surveys of households. But to produce individual price or cost-of-living indexes and then combine them into indexes for demographic subgroups, it would be necessary to combine, for each household, monthly information on the prices it paid, the amount expended on each item, and its basic demographic characteristics. Since retailers cannot provide information on either their patrons’ demographic characteristics or overall expenditure patterns, it would be necessary to collect the monthly price data, as well as expenditure patterns and demographic information, directly from consumers.
As soon as one begins to think through the implications of collecting such data, however, it becomes increasingly difficult to support the proposition that a monthly (or even annual) price or cost-of-living index could be constructed for individual households. There are many types of goods that an individual consumer buys only at infrequent intervals, and among the goods that a consumer does buy frequently, purchases often vary among different qualities and brands of those goods. Consumers may make rental and utility payments and buy some categories of goods (e.g., food or beverages) on a monthly or more frequent basis, but a major fraction of their purchases occur at longer—in many cases much longer—intervals: How often do people buy a winter suit, a bottle of aspirin, a lawnmower, a resort vacation, a television set, or a refrigerator? For medical care,