• What is an index (set base = 100 for comparability)
• CPI:
– index of amount needed to buy base basket of goods today.
– at base it is asking whether we’re better off, with a utility function in quantities as the basis of the methodology
– weights derived from reported expenditures on each item as estimated by the Consumer Expenditure Survey (家計調査kakei chōsa, 家计调查jiājì diàochá)
• Issues
– substitution: can use geometric mean of price changes of close substitutes rather than weighted arithmetic average
– quality: hedonic measures for cable TV, cars, and many other goods, including housing
http://www.bls.gov/cpi/cpifact9.htm How BLS Measures Price Change in the Consumer Price Index for Cable and Satellite Television and Radio
– sampling: improved with use of barcode data, but still many challenges from new goods and new retailers / shopping habits. how reflect e-commerce?
• biases: in general underestimate changes, by 1% and at low inflation likely more
– paper on store sampling issues:
Nakamura, Alice O., Emi Nakamura, and Leonard I. Nakamura. 2011. “Price Dynamics, Retail Chains and Inflation Measurement.” Journal of Econometrics, Measurement with Theory, 161 (1): 47–55. doi:10.1016/j.jeconom.2010.09.005.
– paper on new goods issues:
Broda, Christian, and David E. Weinstein. 2010. “Product Creation and Destruction: Evidence and Price Implications.” American Economic Review 100 (3): 691–723. doi:http://www.aeaweb.org/aer/.
– paper on substitution and related issues:
Handbury, Jessie, Tsutomu Watanabe, and David E. Weinstein. 2013. “How Much Do Official Price Indexes Tell Us about Inflation?” doi:http://www.nber.org/papers/w19504.pdf.
• Sources of data: BLS web site has lots and lots of information on how collected, how computed, defects and biases and so on. An example of quick facts:
> Prices for the goods and services used to calculate the CPI are collected in 87 urban areas throughout the country and from about 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords or tenants.