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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
Throughout the report, we explain how alternative choices in index design could affect use of the index for each of these purposes. Where relevant, we spell out the public policy consequences of using alternative index designs for making cost-of-living adjustments in public transfer programs, indexing the tax system, and for other purposes. And while we make no recommendations on the subject, we explore the public policy implications of using a wage instead of a price index for escalating social security and other benefits.
The CPI is constructed from several sample-based sources: the Consumer Expenditure Survey (CEX), the Point of Purchase Survey, the Commodities and Services Survey, and the CPI Housing Survey. There are two distinct approaches that could be taken to change the data collection apparatus: the first would be to improve each survey component, assuming that the basic structure will remain in place; the second would involve redesigning, from the ground up, the entire data collection apparatus. The panel considered options under both approaches.
The panel addresses questions about both the accuracy and precision of the CEX, which is the primary tool for establishing the CPI upper-level weights (at the basic, 218-item level). The panel’s foremost concern is with the extent of bias in the CEX which, in turn, affects the accuracy of CPI expenditure category weights. In this context, it is worth evaluating the pros and cons of using alternative data sources—such as those used to produce per-capita personal consumption expenditures for the national accounts—for deriving the national CPI upper-level weights.
Assuming that the CEX is the appropriate source for generating CPI weights, there is the question of optimal survey sample size. The report addresses these questions and provides some calculations that indicate the relationship between sample size and the precision (variance) of derived item strata weights. Of course, precision requirements set for the national index will yield very different answers than similar ones for component indexes or if population subindexes are desired.
In addition to questions about sample size and accuracy, there are a number of issues that involve assessing the information content of questionnaires and the general structure of the CEX. There are also questions about how the mode of data collection might be modified to take advantage of new computer-based data collection methods, whether all expenditures for all item categories should be collected from all households surveyed (or just some from each), and what processing system is required for the CEX in order to expedite development of a superlative index. Answers to all these questions hinge on the types of indexes that BLS will be called on to produce.
A second major survey input to the CPI is the Point of Purchase Survey (POPS), which is used to determine which outlets BLS data collectors visit to record price changes of index items. The POPS produces outlet-specific expendi-