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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
or some subset of these items; and still others use the sum of depreciation at replacement cost value and mortgage interest payments as a (very) rough measure of user cost. No other CPIs extend the “flow of service” concept to the pricing of other consumer capital goods, although that course has sometimes been proposed to the BLS for the pricing of automobiles (Boskin et al., 1996:recommendation 8).
This brief sketch gives an indication of the wide range of conceptual and measurement issues that arise in determining how to measure changes in the prices of consumer capital goods and their services. However, given both the importance of covering the many other subjects the panel was asked to address and the constraints of time, we did not examine these issues in any depth or formulate recommendations on them.
INDEX PURPOSE AND DESIGN
It is clear that there are many difficult issues to resolve in designing a consumer price index or indexes. How some of the decisions should be made may be dictated by the purpose for which the index is to be used—the index designer needs to keep the index user in mind. Although no restrictions need be placed on the number or variety of research and experimental indexes, a desire to avoid public confusion may constrain the number of separate official indexes that are published. More importantly, there are inherent limits on the extent to which it is possible to match the design of an official index to a particular purpose, limits that are often dictated by what can reliably be measured. As a consequence, public policy makers and private users of indexes need to be aware of the extent to which a particular price index does not measure exactly what they want measured. In fact, considering its range of applications, it is probably rare when the CPI does measure exactly what is needed. The CPI is currently used in many ways, including:
as a compensation measure to calculate how much is needed to reimburse recipients of social security and other public transfer payments for changes in the cost of living, and for formal or informal use in wage setting;
for inflation indexation in private contracts;
as a measure with which to index the income tax system to keep it inflation neutral;
as a measure of inflation in inflation-indexed U.S. Treasury bonds;
as an output deflator for separating changes in GDP and its components into changes in prices and changes in real output; and
as an inflation yardstick for the Federal Reserve Board and other macroeconomic policy makers.