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: 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 a more modest plan:

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. (Recommendation 8-1)

ACCOUNTING FOR SUBSTITUTION BEHAVIOR

When prices change, consumers tend to shift their purchases toward those goods and services whose relative prices have decreased, thereby reducing any adverse consequences of the price changes on their costs of living. A fixed-basket index does not reflect this substitution effect. The BLS has recently made some changes in the method of constructing price indexes for many categories, or strata, of goods (utilizing geometric means of individual price relatives) in an effort to capture within-strata substitution effects. It will shortly begin producing a superlative index to approximate substitution effects among strata. But because some of the data necessary to construct a superlative index will not be available to meet the CPI’s publication schedule, the superlative index will be available only after a 2-year lag.

The panel agrees that the BLS should continue to produce, as its main index, a real-time CPI. employing a selective use of geometric means for producing individual strata indexes and Laspeyres weights to combine the strata indexes into the overall CPI. Further research should be conducted on consumer shopping and substitution behavior with an eye to improving knowledge of the appropriate application of geometric means at the lower level of index construction.



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