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122 Monthly Lab. Rev. 29 (1999)
Consumer Price Index Research Series Using Current Methods, 1978-98

handle is hein.journals/month122 and id is 581 raw text is: Consumer Price Index research series using current methods, 1978-98 BLS research indicates that the measured rate of inflation would have been lower since 1978 if methods currently used in calculating the Consumer Price Index for All LUrhan Consumers had been in place from that year to the present Kenneth J. Stewart and Stephen B. Reed Kenneth J. Stewart and Stephen B. Reed are economists in the Division of Consumer Prices and Price Indexes, Bureau of Labor Statistics. he Consumer Price Index (CPI) is the most widely used measure of inflation in the United States and affects nearly all Americans. Annual cost-of-living adjustments (COLAs) for Social Security recipients and Fed- eral and military retirees are tied to changes in the cPI, which also is used to determine the an- nual escalation of Federal income tax brackets, as well as personal exemption and standard de- duction amounts. In addition, the CPI is used in the calculation of many key economic indica- tors that require real- or constant-dollar meas- ures, including estimates of income, earnings. productivity, output, and poverty. The Bureau of Labor Statistics has made nu- merous improvements to the CPi over the past quarter-century. While these improvements make the present and future cPi more accurate, histori- cal price index series are not adjusted to reflect the improvements.' Many researchers, however, would like a historical series that was measured consistently over the entire period. Accordingly. this article presents an estimate of the CPI-u from 1978 to 1998 that incorporates most of the im- provements made over that time span into the entire series. The new measure, called the cpi re- search series using current methods (CPI-U-RS). attempts to answer the question, What would have been the measured rate of inflation from 1978 forward had the methods currently used in calculating the cpi-u been in use since 1978?- The CPI-U-RS was constructed by adjusting na- tional CpI-u index series for methodological im- provements, usually at the level of the item stra- tum. such as new vehicles or residential rent. Thar is, the adjustments were made. not to the aggregate all-items CPi U directly, but rather to its component indexes. These adjusted series were then aggregated by using the official cpI-u base-period expenditure weights to form the all- items CPI-U-RS and other high-level aggregates.' In this regard, it is important to note that the com- ponent indexes were adjusted directly; individual prices were not used to recompute those indexes. For example, as explained later, adjustments were made to the historical values of the CPI-U television index to reflect the estimated impact on that index of hedonic regression-based qual- ity adjustment, had that method been employed prior to its implementation in January 1999. No attempt was made, however, to recompute the television index by applying hedonic regression analysis to the individual television prices col- lected for the cpi during the 1978-98 period. Such an effort would not have been feasible, in part because the early price data are no longer available. It is also important to recognize that the cpi- U-RS provides an annual inflation series that ad- justs only for specified changes in BLS method- ology. No attempt has been made to incorporate research results, such as those on the value of safer, but perhaps less comfortable, air travel, for which there is no corresponding method- Monthly Labor Review June 1999 29

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