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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
aggregated into a single official price index? When are different price indexes for specific population subgroups needed? And how should data to produce such subgroup indexes be collected? (2) When a single overall index is produced, how should the costs of living of individual households be combined into a single national index? Should equal weight be given to each household’s cost of living or, as is now the case, should the individual costs of living be weighted by the overall consumption spending of each household?
The Consumer Expenditure Survey indicates the extent to which various economic and demographic groups allocate their budgets differently among categories of goods and services. However, substantial variation may also exist among different groups of households with respect to the particular types and qualities of goods they purchase and the prices they pay within each category. But because the price data used to produce the CPI are collected from retail stores and not directly from households, it is impossible to associate the economic and demographic characteristics of buyers with the items they buy and the prices they pay. As a consequence, it is impossible to investigate satisfactorily the two major aggregation issues we identified: To what extent does inflation or changes in living costs differ among the various economic and demographic groups? And to what extent would a democratic index behave differently from a plutocratic one?
With current survey techniques and methods, collecting price as well as expenditure data from households on a scale sufficient to produce the CPI and an array of group indexes would be extremely expensive and possibly even infeasible. We therefore propose something more modest:
Recommendation 8-1: BLS should pursue an exploratory research program that would, initially only on a small scale, investigate and assess several alternative approaches—including, but not limited to, the use by survey respondents of handheld scanners and computers—for collecting prices in a way that allows them to be associated with household characteristics. A first objective might be the production of indexes for a few commodity categories and several demographic groups.
TECHNICAL NOTE 1: AGGREGATION AND THE “REPRESENTATIVE CONSUMER”
The concept of the “representative consumer” frequently comes up in discussions of COLIs and of price indexes more generally. Indeed, it is often difficult to discuss COLIs with non-economists, policy makers, or the public at large without some sort of appeal to the concept. Sometimes the use is ambiguous or implicit: For example, a COLI might be presented in terms of the amount of money needed to keep consumers, or even “the consumer,” as well off as before the price change. Or it might appear in thinking about the change in expenditure that would