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The most widely used total or headline inflation measure is the Consumer Price Index (CPI). Inflation is often said to be “persistent increases in the general level of prices, or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond available quantities of goods and services.” Inflation measures developed based on this approach represent partial measures only, because they pertain to a number of individual transactions in specific markets. The cost of this subset of goods and services is then compared in two distinct periods to yield a measure of inflation.

There are other income factors, besides the aggregate national income and labour income factors discussed in Ch. 4, that contribute as much uncertainty to the incomes of individuals and organizations as do many risks currently traded in financial markets. If those who retail insurance policies against risks of changes in values of claims on incomes or service flows are to be able to tailor their insurance to the various exposures that their different clients have to these risks, they will want to layoff in hedging markets the risks of changes in these income factors that influence them because they are providing the insurance policies. This chapter considers some of the most salient of these other markets: real estate, unincorporated business, and privately held corporations, consumer and producer price index futures, agriculture, and art and collectibles. It also presents some ideas on systematic approaches to finding other markets, including modelling the tendency for co‐movement of incomes and inferring the underlying factors, i.e. looking for the major risk factors to incomes for which new markets would be most useful.

This chapter provides a detailed history of the evolution of the Consumer Price Index (CPI), and a comprehensive review of the various commissions formed to study it. It reveals the long-standing nature of many CPI issues that are still controversial today. Apart from providing various CPI reviews, the authors present their views on the alternative methodological foundations for a consumer price index and, in particular, debate the merits of the economic or Cost-of-Living Index (COLI) approach versus the Cost-of-Goods Index (COGI). It is found that the COLI approach to CPI index construction is superior to either the COGI or test approaches, but it is also noted that the test approach can be useful on occasion as a supplement to the economic approach to index construction.

Debt of households has been rising rapidly since 1995. The debt to income ratio of the bottom 95 percent of the income distribution has risen well above 140 percent. The same measure for the top five percent has been stable near 60 percent for 25 years. Low interest rates, easy credit terms, subprime mortgages, and mortgage refinancings have all stimulated consumer borrowing. The housing bubble, nationwide, encouraged consumers to extract cash from their properties. Panel regressions relating per capita household debt to declining income shares by state of the bottom 80 percent show that as income shares decline household debt rises. Economic insecurity objectively measured has been rising. The share of household budgets spent on the necessities of housing, health care and education have risen for all quintiles. Prices of those three have exceeded inflation for 20 years. Stagnant incomes and rising prices for those necessities have lured households to take on more debt to sustain their standard of living.

Presents improved estimates of the cost of living and the real wages of labourers in the western part of the Netherlands. The results show that even in this relatively dynamic economy there was a decline in real wages during the Early Modern Period.

The measurement of the output of the medical care system is necessary to assess the productivity levels and growth of a country's economy and medical care system. Medical price indexes have uses other than those involving output and productivity measurement. In the United States, both within the health sector and more generally, contracts occasionally contain provisions that depend on growth of the medical Consumer Price Index (CPI). The CPI and the Producer Price Index (PPI) are also employed in updating fee schedules for certain administered pricing schemes and payments to some health plans. This chapter reviews the measurement issues underlying the construction of medical care price indexes. It describes procedures employed by the U.S. Bureau of Labor Statistics in the construction of its medical CPIs and PPIs (including recent revisions and changes). It also discusses alternative notions of medical care output that involve the price of a treatment episode rather than the prices of fixed bundles of inputs. Finally, the chapter outlines salient features of a new price index for health expenditures.

This chapter provides a detailed review of alternative treatments of homeownership in a Consumer Price Index, discussing the advantages and disadvantages of several approaches to measuring homeowner costs. These include the acquisition price of housing units, per-period homeowner spending for mortgage interest and other periodic payments, user cost, and rental equivalence. The user cost and rental equivalence techniques are alternative flow-of-services approaches. The chapter records that a major difficulty associated with forming any housing price index is that units are unique and also depreciate over time, making it difficult to construct price indexes using a matched-model methodology. It discusses various methods for overcoming this difficulty.

This chapter describes a case for including the transactions costs in a Consumer Price Index, and a user cost model for the treatment of financial services, in which the prices of loan and deposit services are represented by the difference between the corresponding interest rates. A risk-free reference rate is also presented. The author constructs various alternative household financial services price indexes using quarterly data from the Bureau of Economic Analysis over the period 1987–2003. There are two controversial components in the author's experimental indexes: the reference rate(s) of return used to calculate the nominal user costs of household bank deposits and household bank loans, and the deflator(s) used to convert nominal financial service flows into real flows.

This chapter focuses on the fact that the Consumer Price Index (CPI) does not compare the prices charged for the same items at different outlets. It describes how the Bureau of Labor Statistics assumes that any price differences can be explained by differences in outlet characteristics valued by consumers, such as locational convenience or customer service. This may result in the failure to incorporate the gains to consumers from the continuing growth in sales at Wal-Mart and other low-price, high-volume superstores. The authors employ the A.C. Nielsen Homescan consumer panel data to identify the price differentials for twenty food product categories between supercenters, mass merchandisers, and club stores (SMCs) and other outlets. These differentials, combined with the SMCs' increasing market share, lead the authors to conclude that CPI food at home inflation is too high by about 0.32–0.42 percentage points annually.

This chapter investigates the consumer price index (CPI) to help elucidate the nature of the problems commonly found in many important official economic statistics of Japan. First, it offers an overview of official statistics in Japan, points out several important deficiencies, and then reviews key issues in the CPI. Using this background, potential problems in several major aspects of the CPI are investigated. These include data collection procedures (including how discounted prices are handled), services, quality change and new products, and aggregation issues (substitution across time, brands, and stores). Next, the chapter looks at a discrepancy between CPI and wholesale price index that probably relates to differences in how quality adjustments are made, and some hitherto neglected aspects of the measurement problem, relating to shopping and storage behaviors. From this analysis, it offers a tentative assessment of the magnitude of the CPI inflation rate bias, and suggests ways to improve the statistics in general and the CPI in particular.

Much has been written in the last decade on broad trends in medical care spending in the United States. Although the most recent evidence is somewhat ambiguous, the apparent slowdown in the rate of increase in aggregate health expenditures over the last five years has been welcomed by many governments, employers, patients, and insurers. This chapter reports on the first three years of a research program aimed at measuring prices and output for the treatment of acute phase major depression. The approach taken in this program of research builds on several recent efforts to construct price indexes for medical care. The chapter begins with an overview of current U.S. Bureau of Labor Statistics procedures for constructing medical care price indexes, and then provides a background on the nature of and alternative treatments for acute phase major depression. It also considers quantities and prices of the treatment bundles from 1991 to 1995, describes aggregate price indexes similar to the Consumer Price Index and the Producer Price Index, and comments on an initial analysis involving hedonic price procedures.

This chapter employs scanner data for price measurement of ice cream. Using scanner or other electronic point-of-sale (EPOS) data in consumer price indexes (CPIs) produce more data and, consequently, less variance, better data and, consequently, less bias, as well as better methods. Scanner data offer a veritable library of information relating to individual item elasticities and cross-elasticities. Direct adjustment, manufacturer's cost adjustment, hedonic adjustment, and characteristic-based subgroups are employed to adjust the quality changes in the CPI framework, or the quality differences in an inter-area price comparison framework. One of the thirty-four “scannable edible” item strata for which separate price indexes are computed in the CPI is “ice cream and related products.” Dividing “ice cream and related items” into four separate modules would lead in a moderate reduction in variance in measuring year-to-year change at the item stratum level, since the subgroups differ among themselves in their year-to-year change.

This chapter examines alternative approaches to the use of hedonic indexes for Consumer Price Index measurement in dynamic markets to explicitly adjust for in-sample and out-of-sample bias when both matched and unmatched data are used. The chapter is organized as follows. Section 8.2 describes the broad nature of hedonic indexes. Section 8.3 outlines thirty-six alternative methods and discusses their relative merits. Section 8.4 summarizes research issues and formulas. Section 8.5 outlines the data for the study: monthly scanner data for three electrical consumer durables: washing machines, vacuum cleaners, and dishwashers. Section 8.6 discusses the results from the thirty-six measures for three products over two years, that is, 216 resulting index numbers. It employs a meta-analysis of this data to better establish the patterns from employing different index number formulations.

This chapter offers an overview of the use of scanner data in the statistical system based on the actual experience of using them to construct a price index designed to be a practical alternative to a price index based on conventionally collected data. It also compares the New York price index for breakfast cereal from the consumer price index (CPI) program to various indexes computed from the scanner data. The results reveal that the amalgamation in the New York cereal indexes did make a difference, and given that the CPI must be unbiased, it is necessary. The CPI computes average prices for a number of items for the convenience of users. The national CPI and the A101 CPI do not track each other very well at all. Moreover, it is illustrated that the standard errors of the scanner indexes are about one-sixth of those of the current CPI.

The medical care component of the Consumer Price Index (CPI) is evolving into a more comprehensive measure of household medical expense price movement in the economy. The personal consumption expenditure is the part of gross domestic product that approximately corresponds to the CPI. The sample of retail outlets for most CPI basic indexes is drawn from the Point of Purchase Survey (POPS), conducted by the Census Bureau for the Bureau of Labor Statistics (BLS). As of publication of the January 1995 CPI, BLS changed the way the CPI treats prescription drugs that lose patent protection. The CPI has not been able to develop a feasible method to directly price health insurance. This chapter discusses the CPI's use of health expenditures, measurement approaches, and other methodological issues to obtain weights and prices. It looks at the organization of the CPI medical care major group as of January 1998, when a revised CPI was introduced.

The role of the methodological foundation for a Consumer Price Index (CPI) has been examined and advocated in two previous reviews of the CPI: the 1961 Stigler Report2 and the 1996 Boskin Report. The role of the Cost-of-Living Index (COLI) concept and its relation to fixed-weight indexes has been central to the debate over the CPI for more than four decades. The COLI approach to CPI index construction is superior to either the Cost-of-Goods Index or test approaches, but it is noted that the test approach can be useful on occasion as a supplement to the economic approach to index construction. In the Boskin Report, issues in quality adjustment played a prominent role because the Boskin Commission attributed much of their estimated upward bias in the CPI to the index's failure to adequately deal with improvements in product quality over time.

This chapter describes the comparison of hedonic and matched-model (MM) indexes for apparel prices in the United States using Sears catalogue data over the period 1914–1993, and compares the resulting indexes with the corresponding Bureau of Labor Statistics (BLS) apparel index over the same period. The research, which is based on roughly 10,000 exact comparisons for the matched-model (MM) index and another 6,500 observations on the prices and quality characteristics of women's dresses, leads to several conclusions and numerous questions for further research. The chapter explains that the Sears MM indexes do not exhibit a consistent negative or positive drift relative to their BLS Consumer Price Index counterparts. It is found that the hedonic price index for women's apparel always increases more rapidly than the corresponding MM index.

This chapter discusses some of the issues involved in implementing the approach of the pricing of medical services. The inclusion of medical care in the chapter highlights the issue of what prices should be used in the Consumer Price Index (CPI). Traditionally, the U.S. CPI collected prices on the goods and services used as inputs to health care—prescription drugs, office visits, surgical procedures etc.—and this appeared to be consistent with a Cost-of-Goods Index framework. It was found that, during the 1990s, a shift was made in the CPI Hospital Services component to pricing patterns of treatment for specific conditions, rather than the individual inputs. Comparing disease-based indexes to indexes simulated using current CPI methodology for New York, Philadelphia, and Boston, the authors suggest that while the disease-based indexes may be superior, given the large standard errors, the differences among indexes were not significantly different in many cases.

This study investigates the effects of simulating the Consumer Price Index (CPI) with alternately sourced weights on the inflation experience for an average US consumer. The Bureau of Labor Statistics currently uses household spending data from the Consumer Expenditure (CE) Survey to construct expenditure category weights, or “item” weights, in the CPI. The Bureau of Economic Analysis also estimates consumer expenditures, but does so at a national level for publication of Personal Consumption Expenditures (PCE) in the National Income and Product Accounts. In this chapter, 2005-2010 price indexes that utilize PCE weights instead of CE expenditure weights are compared with the CPI-Urban in order to evaluate current CPI weighting methods. These comparisons show that the annualized growth rate over five years of an adjusted PCE-weighted CPI is slightly lower than that of the CPI-U, while a reweighted index that uses PCE expenditure definitions grows much more quickly than the CPI.

This chapter illustrates how consumer shopping behavior can dramatically alter the true price paid relative to what a price index based on survey sampling might measure. Some problems that arise in using scanner data in the consumer price index (CPI) are evaluated. Cost-of-living index (COLI) theory rests on a theory of an individual consumer's behavior. Explorations of scanner data, and indeed of methods for calculating component indexes of the CPI, have mostly used standard index number formulas from the existing price index literature, applied to store data. Price indexes calculated using scanner data always appear to differ from the CPI. Moreover, acquisitions and consumption periodicities differ, and the period-to-period store prices diverge from households' acquisitions and consumption prices in ways that depend on their inventory and shopping behaviors. Better classifications in the CPI are needed in order to have CPI component indexes that are suitable for economic analysis.