The BLS should also proceed as planned to begin publishing a superlative index with a 2-year lag. For purposes of producing a timely index for determining cost-of-living allowances for social security benefits and other indexed programs, we recommend an additional series:

The BLS should publish, contemporaneous with the real-time CPI, an advance estimate of the superlative index, utilizing either a constant-elasticity-of-substitution method or some other technique. (Recommendation 7-1)

QUALITY CHANGE

Dealing with the ever-changing mix and quality of available goods and services poses the most numerous and difficult problems in constructing the CPI. Items constantly disappear from store shelves and are replaced in the index with similar but somewhat different items carrying different prices. The BLS must continually make judgments about how much of a price difference represents “pure” price change and how much represents a quality difference. Increasingly, BLS has been turning to explicit quality adjustment techniques, principally hedonics, in which statistical regressions are used to assign monetary values to differences in the particular characteristics of a type of product and to adjust its reported prices accordingly when the characteristics of the good change.

Hedonic techniques currently offer the most promising approach for explicitly adjusting observed prices to account for changing product quality. But our analysis suggests that there are substantial unresolved econometric, data, and other measurement issues that need further attention. The panel makes a number of recommendations to deal with this set of opportunities and problems:

BLS should continue to expand its experimental development and testing of hedonic methods and its support of relevant outside research. This research should not be confined to that relating to price adjustment but should also examine the role of hedonics in statistical audits of the other BLS quality adjustment methods and in the review of replacement item selection procedures and comparability decisions. (Recommendation 4-2)

The above recommendation does not suggest that BLS should immediately expand the use of hedonics in constructing component indexes for its flagship CPI. In fact, the panel takes the opposite position:

Relative to our view on BLS research, we recommend a more cautious integration of hedonically adjusted price change estimates into the CPI. (Recommendation 4-3)

This recommendation is based on theoretical considerations, not on empirical grounds. As documented in the report, the recent BLS expansion of hedonic price



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