Does the CPI Overstate Increases in the Cost of Living? - The Southwest Economy, Issue 5, 1995 - Dallas Fed

Does the CPI Overstate Increases in the Cost of Living? of the biases due to substitution than on the biases due to quality change and the introduction of new goods. Furthermore, the biases associated with substitution are quantitatively small. Second, while quality change and the introduction of new goods potentially pose big problems for the CPI, there is very little hard empirical evidence to suggest that they in fact do so. In discussing the potential problems with the CPI, it is often overlooked that the Bureau of Labor Statistics (BLS) has a variety of mechanisms in place to handle both quality change and the arrival of new goods in the marketplace. The question then becomes not whether the CPI overstates inflation because it neglects these developments, but rather how well the procedures used by the BLS perform relative to a more ideal alternative. The final point: trying to arrive at an estimate of the overall bias in the CPI is like trying to hit a moving target. The BLS regularly updates its procedures in response to perceived problems with the CPI. Thus, problems that were serious in one time period for a particular category of goods may no longer be an issue. It is not clear that in arriving at an estimate of the overall bias researchers can simply add up the various number that have been produced by different studies.