it is unlikely most people will experience the same major procedure more than once a lifetime.4

Even for those categories of goods that are purchased frequently, many households may switch purchases among products that possess somewhat different qualities and are available at different prices, occasionally or often buying different kinds of green vegetables, meat, fish, shampoo, cosmetics, beer, and the like from week to week and month to month (quite apart from substitutions among products driven solely by changes in relative prices). But construction of the current CPI involves the measurement of period-to-period changes in the prices of goods of the same quality purchased in stores that provide the same services to shoppers. BLS goes to great pains to price the identical item each month in each retail store from which it is collecting prices. When that item disappears from a store and BLS must substitute another similar item to price, it devotes substantial resources in an effort to separate the difference in price between the old item and the new item into a component that represents quality changes, which it does not include in the index, and a component of “pure” price change, which it does include (see Chapter 4). And when new outlets are introduced into the sample of stores from which it collects prices the BLS “links” them in, so that any difference in prices is attributed to differences in the quality of service and does not cause a change in the price index. All in all, it would be impossible—even through observing a high-frequency series of prices paid by an individual household (monthly or even annually)—to calculate an index that measures the rate of inflation or the rise in the cost of living that the household has experienced.

An Alternative Approach

A less ambitious but more feasible approach to the aggregation problem would be to exploit the fact that an important part of the heterogeneity among households in consumption patterns and prices paid is systematically related to differences in their economic and demographic characteristics and in their geographic location. The nearest approximation to a homogenous unit that could form the building block for purposes of aggregation across households might, therefore, be an index of the prices of specific goods actually paid by a group of

4  

In theory one might treat all goods which satisfied a consumer’s wants for any period longer than, say, a month as a durable good. Durable goods so defined might then account for 90 percent or more of aggregate consumer purchases. But that wouldn’t simplify the problem. Simply to calculate for a single individual household the user cost or opportunity cost of the monthly flow of services, for all of the services consumed by that household from the “durable” goods it owned, one would have to collect monthly data on prices paid from a group of households sufficiently large to furnish a statistically valid sample of price quotes for each of those durable goods.



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