Abstract:
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In 2002, the Bureau of Labor Statistics (BLS) began publishing a new consumer price index (CPI) called the Chained Consumer Price Index for All Urban Consumers. Designated the C-CPI-U, the new index joins the existing indexes already produced by the BLS: the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W). The C-CPI-U is an example of a superlative index; that is, one designed to be a closer approximation to a cost-of-living index than the present measures. By utilizing expenditure data in adjoining months, it is designed to reflect consumer substitution across item categories in response to changes in relative prices. This should effectively eliminate what is sometimes termed upper-level substitution bias. One of the difficulties encountered by BLS in developing the new index was selecting a method to estimate reliable monthly expenditure weights at a detailed level on a real-time basis. This paper discusses the alternative expenditure weight estimation methodologies evaluated by BLS, and identifies the ultimate calculus adopted for the construction of the C-CPI-U.
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