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At What Price?: Conceptualizing and Measuring Cost-of-Living and Price Indexes
An unconditional cost-of-living index is an unsuitable conceptual basis for the CPI. While research aimed at better understanding the economic effects related to changes in such matters as life expectancy, crime rates, or the environment would be useful for evaluating various aspects of public policy, the CPI should not change in response to changes in such factors. (Conclusion 2-1)
Within the general conceptual framework of cost-of-living indexes, the appropriate theoretical concept for the CPI is aconditionalcost-of-living index that is restricted to private goods and services and in which environmental background factors are held constant. (Conclusion 2-2)
The BLS should not conduct research on its own aimed at producing a CPI with a substantially broader domain. That said, the panel encourages the BLS— jointly with other federal statistical agencies, particularly the Bureau of Economic Analysis (BEA)—to undertake or sponsor research aimed at producing, on an experimental basis or in satellite accounts, more comprehensive measures of national output, income, and prices. These accounts would seek to include the effects on output, income, and prices from changes in some of what we have labeled “outside conditions” in those cases where there may be at least some chance of measuring those effects—perhaps, for example, changes in the status of the natural environment.
Households differ from one another in their consumption patterns and shopping behavior and often pay different prices for the same goods. Part of this heterogeneity is associated with differences in households’ economic and demographic characteristics and in their geographic location. This fact gives rise to two kinds of issues: First, for such purposes as adjusting social security payments and the tax system, and for measuring changes in real income, when can one aggregate the data for the whole population into a single official price index; when are different price indexes needed for specific population subgroups; and how can the data needed to produce such subgroup indexes be collected? Second, 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 (a “democratic” index) or, as is now the case, should costs of living be weighted by the overall consumption spending of each household (a “plutocratic” index)?
The Consumer Expenditure Survey indicates the extent to which various economic and demographic groups allocate their budgets differently among categories of goods and services. The panel believes, however, that substantial