Paul A. Armknecht, Brent R. Moulton, and Kenneth J. Stewart (1995) "Improvement to the Food at Home, Shelter, and Prescription Drug Indexes in the U.S. Consumer Price Index."
While the U.S. Consumer Price Index (CPI), as a Lasyeyres-type index, attempts to measure the average change in the prices paid by urban consumers for a fixed market basket of goods and services, new samples for most item categories are routinely introduces over time to keep the CPI sample representative of consumer spending patterns. This paper will describe methodological changes being implemented in January 1995 to the food at home, shelter, and prescription drug components of the U.S. Consumer Price Index (CPI). These changes reflect improvements designed to make the CPI more representative of price changes experienced by consumers.
Food at Home. The U.S. Bureau of the Census conducts a Point-of-Purchase Survey (POPS) to provide the sampling frame of outlets for most non-shelter components of the U.S. CPI. To keep the outlet and item samples representative of consumer expenditures, the POPS is conducted annually in approximately 20 percent of the Primary Sampling Units (urban areas) in the CPI and new outlets are selected to replace the old samples.
The procedures currently used by the U.S. CPI cause it to give high weight to sample items that are on sale during the month that a replacement sample is introduced, and low weight to sample items that are not on sale. These procedures can cause an overstatement of price change in an urban area immediately after its sample is replaced. We discuss a sample aging procedure that will be used to alleviate this problem for food-at-home items.
Shelter. Further investigation of the functional form bias noted for non-shelter items (Reinsdorf 1994) has uncovered an analogous problem with the estimator used for imputation of implicit rent changes for owner occupied housing. In addition, rent data are collected less frequently than other prices, at 6-month intervals. The current rent indexes are estimated using a composite of 6-month rents and renters' reports of 1-month rent changes. We discuss both improvements in our strategy for imputing changes for owner's implicit rents, as well as changes in our treatment of estimating changes for rent.
Prescription Drugs. Another potential source of bias in the U.S. CPI is the treatment of brand name prescription drugs after their patent expires. Griliches and Cockburn (1993) present evidence that there is substantial substitution of generic drugs for brand drugs when patents expire. The U.S. CPI does not pick up such substitution in a timely manner. To address this situation, BLS will institute new substitution procedures for the prescription drug component of the CPI.
Last Modified Date: July 19, 2008