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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
purchasing pattern and prices paid of each household would be given equal weight.
Aggregation and Data Collection
Various empirical studies have combined the basic CPI strata price indexes with expenditure weights reflecting the consumption patterns of a particular group—most notably, the elderly and the poor. In general, these studies have tended to show that the individual group indexes have sometimes risen faster or slower than the overall CPI, but the differences were usually small. Common observation shows, however, that within any category of expenditures (such as a stratum) high-income households buy different items, of different qualities, and often at different stores than do low-income consumers. And the probability that a consumer will purchase a new good during the early period, after which the price often falls, is almost certainly correlated positively with income. Simply reweighting strata prices at the upper level will not show whether price or cost-of-living indexes for the rich, the poor, the elderly, and other subgroups in the population sometimes move differently than the index as a whole or whether a democratic index would behave differently from a plutocratic one.
Testing these possibilities can only occur if data are collected in a way that allows the prices of individual items to be linked to the demographic and other characteristics of those who buy them. But, as explained above, the BLS collects data on price changes for individual items not from households but from retail stores and other sellers. There is no link between the prices of individual items and the economic and demographic characteristics of the consumers who bought them. As a consequence, the current collection system cannot produce the data needed to answer the questions posed above.
CHANGES IN THE QUALITY OF GOODS
Ideally, both a COGI and a COLI ought to be based on changes in the prices of “constant-quality” goods. When a consumer switches to a higher (or lower) quality good, the difference in the price paid for the two goods should be adjusted to remove that part of the difference attributable to the change in quality. If, as is usually the case, the average quality of goods that people purchase improves over time, an index appropriately corrected for quality change will rise more slowly than one measured by the change in unadjusted (nominal) prices. The most frequent criticism of the CPI in recent years, typified by the Boskin commission report, has been that it significantly underestimates the extent of quality improvement in goods and services and therefore overstates the rate of inflation. For many decades, the BLS had been aware of problems posed by goods and services whose quality changed over time and had cautiously extended its use of explicit quality adjustments. More recently, it has begun to move somewhat more aggressively in that direction.