The CPI Commission
Boskin, Michael J., Business Economics
The CPI Commission is the first official systematic external expert evaluation of the nation's price statistics in thirty-five years. The Stigler Commission report, issued in 1961, raised some of the same issues and was an important input to the major changes made by the Bureau of Labor Statistics (BLS) in 1978. But since 1961, there have been numerous important developments that could not have been readily predictable at that time: major theoretical breakthroughs in index number theory and in methods to adjust for quality change, plus technological change such as scanners, on the one hand, and the widespread indexing to the consumer price index (CPI) of the government budget in response to the high inflation of the 1970s, on the other. These developments make the Commission's recommendations to improve the accuracy of the CPI both more important, and more feasible, to implement.
The Commission examined everything from the mathematics of the index number formulas to BLS procedures to the actual price collection mechanism. The Commission was greatly assisted by the cooperation from many dedicated, talented people at BLS. Indeed, our findings and recommendations have been heavily influenced by our interaction with BLS.
While the widespread indexing of government programs makes the budgetary and programmatic ramifications of our findings enormous, every single finding and recommendation of the Commission would be identical even if the budget were in surplus and there were no long-run entitlement cost problems on the horizon.
Many of the issues raised and findings reported are endemic to the generation of price statistics in all countries. This is not just a problem with the U. S. CPI. It is a problem with the price statistics in all countries. In some dimensions, the U.S. BLS is ahead of the statistical agencies in other countries, e.g., in its use of sampling techniques. In some other dimensions, other agencies have moved ahead faster to correct some of the problems. For example, Statistics Canada has already implemented one of our recommendations, the movement to geometric means at the lowest level of aggregation in the price statistics. All of these agencies, especially the BLS, have active research and programmatic plans to make improvements in some of the areas covered in our recommendations. As indicated below, this is likely to take some time and resources, and, while the Commission believes that the statistical agencies should move forward with all deliberate speed - emphasizing both deliberate and speed - they are going to catch up only partially and gradually.
Measuring prices, and their rate of change, accurately is central to almost every economic issue from the conduct of monetary policy to measuring economic progress over time and across countries to the cost and structure of indexed spending and taxes. Many private contracts, including indexed bonds, are explicitly tied to the CPI and an even larger number calibrate informally. About one-third of the U.S. federal budget outlays are automatically escalated each year by the change in the CPI, as are income-tax brackets (but unfortunately without the definition of income).
In the first external extensive evaluation of the nation's price statistics since the Stigler Commission in 1961, the CPI Commission (see Boskin, Dulberger, Gordon, Griliches and Jorgenson (1997)) concluded that the change in the CPI overstates the change in the cost of living by about 1.1 percentage points per year (the range of plausible values is 0.8 to 1.6 percentage points). Federal Reserve Board (Fed) Chairman Alan Greenspan recently testified that Fed research points to a bias of 1.0 percentage point. (Greenspan (1997)). Several of the world's leading experts on the subject have written that, if anything, the Commission's estimate may be slightly low (Diewert (1997), Hausman (1997), Nordhaus (1997)).
If inflation as measured by the percentage change in the CPI is running 3 percent, these findings suggest that the true change in the cost of living is about 2 percent. …