Monthly Labor Review • August 2008 

Misconceptions about the CPI

John S. Greenlees and 

Robert McClelland are 

research economists 

in the Division of Price 

and Index Number 

Research, Bureau of 

Labor Statistics; Robert 

McClelland is also 

Chief of the Division. 

John S. Greenlees

and

Robert B. McClelland

Addressing misconceptions

about the Consumer Price Index

A number of longstanding myths regarding 

the Consumer Price Index and its methods of construction 

continue to circulate; this article attempts to address 

some of the misconceptions, with an eye toward increasing

public understanding of this key economic indicator

The Consumer Price Index (CPI), 

published by the Bureau of Labor Statistics (BLS), has generated controversy throughout its history. A 

soon-to-be-published article by Marshall 

Reinsdorf and Jack Triplett discusses the 

many past reviews of the methods and data 

used in the CPI’s construction.1 Beginning 

with an advisory committee appointed by 

the American Statistical Association in 

1933,2 and continuing through the recent 

National Research Council panel chaired 

by Charles Schultze,3 panels and commissions have identified and discussed what is 

now a well-known set of issues affecting the 

measurement of consumer prices: consumer 

substitution behavior, change in the quality 

of products, the introduction of new types 

of goods and services, and the appearance 

of new categories of stores and new channels of product distribution. Given the 

large number of private and public uses of 

the CPI, and especially its important role in 

determining Federal Government revenues 

and payments, it is natural that each of those 

issues has been the subject of intense public 

attention.

Within the past several years, commentary on the CPI has extended well beyond 

the circle of economists, statisticians, and 

public officials. The strongest criticism of 

BLS methodology has not been concentrated 

in a single profession, academic discipline, or 

political group, but comes instead from an 

array of investment advisers, bloggers, magazine writers, and others in the popular press. 

Also, whereas in the past the CPI frequently 

was held to be overstating inflation, recent 

criticism has focused on supposed downward biases.

Appearing as they do in national media and in the age of the Internet, these 

criticisms probably have been more widely 

quoted and circulated than most academic 

journal articles and panel reports on CPI

issues. Although the BLS welcomes comments and regularly discusses and debates 

measurement issues with its advisory committees and at professional meetings of 

researchers in economic measurement, the 

recent criticisms of the CPI have been directed not so much to the BLS itself as to 

the public at large. This article is an attempt 

to correct some of the misunderstandings 

underlying those criticisms.

The article begins with a brief background 

section on what the CPI is, how it is used, 

and what some of its major methodological 

changes have been. Three measurement issues 

that have been the subject of greatest misunderstanding—consumer substitution, quality 

adjustment, and homeownership costs—are 
Misconceptions about the CPI

 Monthly Labor Review • August 2008

then discussed, followed by reviews of two issues that relate 

to almost all current commentary on the CPI: the specification of a “core” index and the differences between the CPI

and perceived inflation. The penultimate section specifically 

addresses a widely cited estimate of presumed upward bias 

resulting from BLS methods, and the article ends with some 

summary remarks.

Along the way, special attention is paid to four common misperceptions, or myths, about the CPI: (1) that the 

BLS lowers the CPI to reflect consumers’ substitutions of 

hamburger for steak; (2) that the use of hedonic quality 

adjustment has substantially decreased the growth rate of 

the CPI; (3) that the 1983 change in the way the BLS measures homeownership costs lowered the rate of increase of 

the CPI; and (4) that Social Security payments are indexed 

to a CPI that does not include food or energy. The analysis 

demonstrates that the improvements to the CPI described 

in this article are consistent with international standards 

and guidelines for the construction of price indexes.

Background

As stated in the BLS fact sheet Understanding the Consumer Price Index: Answers to Some Questions, the CPI is 

a measure of the average change over time in the prices 

paid by urban consumers for a market basket of consumer 

goods and services.4 In simple terms, when prices change, 

the goal of the CPI is to measure the percentage by which 

consumers would have to increase their spending to be 

as well off with the new prices as they were with the old 

prices. For example, if the price of every product went 

up by 5 percent, consumers would have to increase their 

spending by 5 percent to remain at the same standard of 

living, assuming that everything else stayed the same. To 

deal with practical questions that arise in the construction 

of the CPI, the BLS uses the economic theory of the costof-living index as a framework.5

 Among those practical 

questions are how to compute the overall CPI when not all 

prices change at the same rate and how to deal with the 

introduction of new types or models of products.

The all-items CPI is constructed from approximately 

8,000 basic indexes, which correspond to 38 geographic 

areas and 211 item categories. Apples in Chicago and 

gasoline in San Francisco are examples of these basic 

CPIs. Since 1978, the BLS has published CPI series that 

reflect the inflation experiences of two different population groups. The CPI for all urban consumers (CPI-U) and 

the CPI for urban wage earners and clerical workers (CPI-W) 

differ only in the relative weights that are attached to 

the basic item-area index components. For example, the 

CPI-W has a somewhat higher weight for gasoline than 

does the CPI-U, because the population of urban wage 

earners and clerical workers allocates a higher share of 

its consumption to gasoline than do urban consumers as 

a whole.

To construct each of the basic CPIs, the BLS periodically 

asks consumers where they shop, picks specific items from 

those “outlets,” and then tracks the prices of those items 

over time. Implementing that process requires a number 

of surveys. The Census Bureau administers a Telephone 

Point-of-Purchase Survey in which consumers are asked 

where they recently purchased goods and services. The BLS

uses data from this survey to select a sample of grocery 

stores, service stations, doctors’ offices, and other locations 

at which to collect prices. At each of these “outlets,” the 

BLS uses probability sampling methods to select a representative sample of particular items. Once the sample is 

selected, prices of those items are collected regularly by 

BLS staff, usually on a monthly or bimonthly basis. Separately, rental prices are collected from a sample of houses 

and apartments to measure prices of shelter services. The 

individual item-area indexes are averaged together with 

the use of weights created from the Consumer Expenditure Survey (CE), which, like the Telephone Point-ofPurchase Survey, is conducted for the BLS by the Census 

Bureau. In the CE, consumers report how they allocate 

their spending across the 211 CPI categories of items, such 

as apples, gasoline, rent, and physicians’ services. All these 

categories are designed to make sure that the CPI reflects 

the inflation experiences of U.S. consumers as a whole.6

The all-items, or overall, CPI-U is the CPI that is reported most widely in the media each month when the 

index is released. Both the CPI-U and CPI-W, however, 

have important uses in indexation. The CPI-W is the index used in the determination of the annual Social Security and Federal retirement cost-of-living adjustments. It 

also is used extensively for periodic wage adjustments in 

collective bargaining agreements. The CPI-U is used for 

indexation of tax brackets, personal exemption amounts, 

and many other quantities in the Federal tax system. In 

addition, the CPI-U is used by the Federal Government to 

calculate adjustments to the principal values of Treasury 

Inflation-Protected Securities, also known as TIPS, which 

have been issued since 1997 to provide a constant inflation-adjusted return to investors.7

Another important use of CPI data is in the construction of the National Income and Product Accounts (NIPA), 

published by the Commerce Department’s Bureau of Economic Analysis (BEA). Numerous CPI component indexes 

are critical inputs into the NIPA Personal Consumption 
Monthly Labor Review • August 2008 

Expenditures (PCE) price index and into the calculation 

of real, or constant-dollar, gross domestic product (GDP). 

Therefore, although the primary focus of the Federal Reserve’s monetary policy is the PCE price series, rather than 

the CPI itself, the basic CPIs are important to anyone who 

follows Federal Reserve policy decisions.

In 2002, the BLS began publishing a third monthly CPI: 

the chained Consumer Price Index for all urban consumers 

(C-CPI-U), created to more closely approximate a cost-ofliving index by reflecting consumer substitution among 

item categories. The C-CPI-U applies to the same population group as the CPI-U, but employs a different formula 

to combine basic indexes. In part because C-CPI-U values 

are revised in each of the 2 calendar years following their 

initial publication, that index does not have any prominent 

uses in indexation. Consequently, those who criticize the 

CPI-U and CPI-W have paid relatively little attention to 

C-CPI-U methods, and accordingly, the focus in the discussion that follows is almost exclusively on the CPI-U and 

CPI-W. 

It is important to recognize that the CPI is a measure of 

inflation as experienced by consumers; other price indexes 

may be appropriate for different purposes. Several other 

indexes, produced by the BLS or by other government 

agencies, measure different aspects of inflation. For example, the BLS Producer Price Index (PPI) measures price 

change at earlier stages of production and marketing, before consumers enter the picture, and the NIPA GDP price 

index measures inflation experienced by governments and 

businesses, as well as by consumers. These differences in 

purpose have important effects on what prices are included in the index; for instance, the PPI and the GDP 

index include steel, heavy trucks, and other nonconsumerspending price categories that are not found in the CPI.

The BLS continuously reviews and enhances the data 

and methods used in generating the CPI. For the purposes 

of this article, three methodological changes have been 

especially significant. The first was a fundamental change 

in the measurement of the cost of shelter for homeowners. 

In late 1981, on the basis of considerable research, the BLS

announced that it would change the treatment of homeownership in the CPI-U from an asset-based approach 

to rental equivalence, effective January 1983.8 The same 

change was implemented in the CPI-W in January 1985. 

A second major change took effect in January 1999, when 

the BLS adopted a geometric mean formula in the calculation of most CPI basic indexes. The purpose was to reflect 

the demonstrated ability of consumers to shift away from 

products whose prices had increased relative to the prices 

of other products in the same basic CPI component—for 

example, away from apples whose prices had increased 

more, or decreased less, than the prices of other apples 

in Chicago. The third change took place over a period of 

years beginning in 1998, as the CPI program expanded the 

use of hedonic regression models for quality adjustment, 

previously confined to housing and apparel, to a number 

of additional series, such as computers, televisions, and 

refrigerators. Each of these three methodological changes 

continues to generate criticism from outside the BLS.

Substitution

Among all the criticisms leveled at the CPI, its use of the 

geometric mean formula to reflect consumer substitution 

behavior is undoubtedly the most frequently misunderstood and mischaracterized. Members of the general 

public are naturally concerned when critics charge that, 

in using the geometric mean, the BLS is subtracting from 

the CPI a certain amount of inflation that consumers can 

“live with” by reducing their standard of living. Some critics have incorrectly claimed, for example, that the BLS 

assumes that consumers are no worse off when they substitute hamburgers for steak. That is not, however, what 

the geometric mean does, and such an interpretation is 

hard to reconcile with the fact that the geometric mean is 

widely used by statistical agencies around the world. One 

of two formulas recommended by the International Monetary Fund9

 and approved by the Statistical Office of the 

European Communities (Eurostat) for use in those countries’ Harmonized Indexes of Consumer Prices (HICP),10

the geometric mean is used by 20 of 30 countries as a 

primary formula for computing the elementary indexes in 

their HICP’s.11 This section attempts to allay the public’s 

concern by reviewing the general justification for the formula, as well as the impact of its use on the CPI.

12

To begin, it must be stated unequivocally that the BLS

does not assume that consumers substitute hamburger for 

steak. Neither the CPI-U, nor the CPI-W used for wage 

and benefit indexation, allows for substitution between 

steak and hamburger, which are in different CPI item categories.12 Instead, the BLS uses a formula that implicitly 

assumes a degree of substitution among the close substitutes 

within an item-area component of the index. As an example, 

consumers are assumed to respond to price variations 

among the different items found within the category 

“apples in Chicago.” Other examples are “ground beef in 

Chicago,” “beefsteaks in Chicago,” and “eggs in Boston.”

There can be no doubt that consumers exhibit shifts in 

their purchasing patterns toward items that have fallen 

in relative price. This behavior is an observable feature of 
Misconceptions about the CPI

 Monthly Labor Review • August 2008

everyday life, not just a theoretical economic principle. 

Consider a carton of orange juice, which is a typical product found within the CPI item category “nonfrozen noncarbonated juices and drinks.” Suppose that a store lowers 

the price of one brand of orange juice, while leaving all 

other prices the same. In response, some consumers will 

consume more orange juice; some will buy the affected 

brand of orange juice rather than other brands; some will 

buy orange juice at this store rather than other stores; some 

will purchase orange juice instead of grapefruit juice; and 

some will buy orange juice now rather than later, using 

the opportunity to stock their refrigerators with a largerthan-usual supply of orange juice. There will be some 

consumers who do not increase their consumption of that 

particular brand of orange juice, but almost certainly, the 

aggregate purchases by all consumers will rise.14

There is also no dispute among economists that the 

price index formula used in all of the basic CPIs prior to 

1999 (called the Laspeyres formula) tends to overstate 

changes in the cost of living; specifically, the change in a 

Laspeyres index is an “upper bound” on the change in the 

cost of maintaining a standard of living.15 This fundamental result is found throughout books on cost-of-living indexes, as well as in economics textbooks.16 It long predates 

the BLS decision to switch to a geometric mean formula 

for computing most of the basic CPIs.17

A simple, if extreme, example suffices to get the point 

across. Suppose that a person buys four candy bars each 

week: two chocolate bars and two peanut bars. The bars 

cost $1 each, so her total spending per week on candy 

bars is $4. Now suppose that, for some reason, the price 

of chocolate bars quadruples to $4, while peanut bars remain at $1. The goal of the CPI is to measure how much 

the consumer needs to spend each week to consider herself just as well off as she was before the price increase. A 

Laspeyres price index calculates the cost of the original 

purchase quantities: two candy bars of each type. Therefore, the answer according to the Laspeyres formula is 

that the consumer would need $10 to be as well off as 

before.18

The Laspeyres answer is correct, however, only if the 

consumer is completely unconcerned with changes in 

price and always chooses to purchase chocolate and peanut bars in equal numbers, regardless of which is cheaper. 

The Laspeyres answer is called an upper bound because 

the right answer cannot be greater than $10; the consumer certainly will be at least as well off as she was before if 

she can continue to purchase two bars of each type. At the 

other extreme, the right answer cannot be lower than $4. 

In the unlikely case that the consumer is entirely indifferent between types of candy bar, she could respond to the 

increase in the price of chocolate bars by buying four peanut bars instead of two of each type, and she would be no 

worse off than she was before, even if she still had only $4 

to spend. Of course, neither the Laspeyres upper-bound 

answer of $10 nor the lower-bound answer of $4 is realistic. In the real world, people make tradeoffs on the basis 

of both price and their preferences, and the actual answer 

lies in between the two bounds. With $7, for example, 

our consumer could afford to buy seven peanut bars, one 

for every day of the week. Thus, $7 might be sufficient to 

make her as satisfied at the new prices of candy as she 

was with $4 at the old prices. Put another way, we can be 

confident that, for some consumers, the Laspeyres result 

of $10 would overstate the amount they need to maintain 

their original level of candy satisfaction. The geometric 

mean formula adopted by the BLS for use in most CPIs 

gives a somewhat lower answer than the Laspeyres formula, because it puts less weight on the prices that have 

increased the most (in this case, the price of chocolate 

bars) and more weight on the prices that have increased 

less. As it turns out, the geometric mean would say that $8 

is the amount needed to keep the average consumer at the 

original satisfaction level. With $8, the consumer could 

purchase one chocolate bar and four peanut bars, offsetting the reduced number of chocolate bars by an increase 

in the total number of candy bars.19

It is important to note two things about this example. 

First, the geometric mean estimate of required spending 

increased sharply, albeit by less than that of the Laspeyres 

index. Second, the objective is to calculate the amount of 

money necessary to maintain a constant level of satisfaction, or what one might term a constant standard of living. 

Critics of the BLS often erroneously assert that reflecting 

substitution behavior in the CPI amounts to tracking a 

declining standard of living. Their argument can be summarized as follows: “the BLS assumes that if steak becomes 

too expensive, consumers will shift to buying hamburger, 

so the CPI reflects a tradeoff of hamburger for steak, not 

steak for steak.” The trouble is that that logic fails to recognize the point made at the beginning of this section: 

that the BLS employs the geometric mean formula only 

within basic CPIs, such as the index for ground beef in 

Chicago. Still, despite the fact that it is wrong, the idea 

that the CPI’s use of the geometric mean reflects substitution between hamburger and steak has attained the status 

of a sort of urban legend, repeated by numerous bloggers 

and commentators.

When the price of a certain type of beefsteak rises, CPI-U

and CPI-W methods allow only for substitution to other types 
Monthly Labor Review • August 2008 

of beefsteak, not to hamburger or other, cheaper alternatives 

to steak. A 1998 article in the Monthly Labor Review emphasizes, “the geometric mean formula will not be used to 

combine the basic indexes in the CPI, such as those for ice 

cream products and apples, into the overall index.”20 As 

mentioned earlier, those indexes are combined into the 

overall CPI-U or CPI-W under the assumption that there is 

no substitution between ice cream products and apples or 

between steak and hamburger.

In addition, the critics’ argument takes as its premise 

that steak, the more desirable product, is getting “too expensive.” As has been noted, the CPI’s assumption about 

substitution is that consumers shift their purchases toward items whose prices are rising less (or falling more), 

not necessarily toward less desirable goods. For example, 

within the CPI category “ice cream and related products,” 

the assumption is that if the price of premium ice cream 

falls relative to the prices of cheaper store brands, consumers will shift toward the premium brands. Within the 

beefsteak category, the CPI implicitly assumes that, on average, consumers would shift up from flank steak toward 

filet mignon if flank steak prices rose by a greater amount 

(or fell by a lesser amount) than filet mignon prices. If 

all prices change proportionately, then no substitution is 

assumed. So, if, for example, a rising cost of beef caused 

filet mignon and flank steak prices both to increase by 10 

percent, the geometric mean formula would not assume 

any substitution toward flank steak.

The quantitative impact of the CPI’s use of the geometric mean formula also has been grossly overstated by 

some, with one estimate exceeding 3 percent per year.21 

It is difficult to identify real-world circumstances under 

which geometric mean and Laspeyres indexes could differ 

by such a large amount. The two index formulas will give 

the same answer whenever the prices used in an index all 

change by the same percentage. The bigger the differences 

in price changes, the more the Laspeyres index will tend 

to exceed the geometric mean. For the growth rate of the 

Laspeyres index to exceed the growth rate of a geometric 

mean index by 3 percentage points, however, the differences in individual price changes have to be quite large.

To see this point, consider another very simplified 

example. Suppose that the CPI sample for ice cream and 

related products in Boston consisted only of an equal 

number of prices for ice cream and frozen yogurt22 and 

that, between one year and the next, all the prices of ice 

cream in Boston rose by 8.6 percent while all the frozen 

yogurt prices fell by 4.2 percent. In that case, the geometric mean estimate of overall annual price change would 

be 2.0 percent, only slightly less than the Laspeyres estimate of about 2.2 percent.23 In order to come up with 

a difference of 3 index points, one has to assume a much 

more dramatic divergence between ice cream and frozen 

yogurt prices than the one hypothesized. For example, if 

ice cream prices rose 30 percent in one year, while frozen 

yogurt prices fell by 20 percent, the overall geometric mean 

index would still rise by 2 percent, but the Laspeyres index 

would rise 5 percent, for a difference of 3 index points. 

However, such a large annual divergence would be quite 

uncommon within CPI basic indexes—between ice cream 

and yogurt, between types of candy and gum, between 

types of noncarbonated juices, or between varieties of 

ground beef. Moreover, for a 3-percentage-point divergence to continue year after year, the divergence between 

the individual component prices would have to continue 

to widen. For example, if, by contrast, during the next year 

ice cream prices increased by the same amount as frozen 

yogurt prices, then the two index formulas would give the 

same inflation estimate for that year. Although such a divergence might plausibly occur in one component for 1 

year, it is beyond belief that such sharply divergent price 

behavior would continue year after year across the whole 

range of CPI item-area components.

Finally, and most importantly, there is rigorous empirical evidence on the actual quantitative impact of the 

geometric mean formula, because the BLS has continued 

to calculate Laspeyres indexes for all CPI basic indexes on 

an experimental basis for comparison with the official index. These experimental indexes show that the geometric 

mean led to an overall decrease in CPI growth of about 

0.28 percentage point per year over the period from December 1999 to December 2004,24 close to the original 

BLS prediction that the impact would be approximately 

0.20 percentage point per year.25

Quality adjustments and hedonic models

The BLS has been faced with two types of criticisms, one 

general and one specific, of the way in which quality adjustment is carried out in the CPI. The first criticism argues, explicitly or implicitly, that no adjustment should be 

made for the difference in quality between an item that is 

no longer sold and its replacement. That position appears 

to be based on a misunderstanding of the purpose of the 

CPI, and it also is impractical, given the rapidly changing consumer marketplace. The second criticism is that, 

by expanding the use of hedonic quality adjustment over 

the past 10 years, the BLS has imposed arbitrary estimates 

of the “pleasure” consumers derive from new products, 

severely distorting the CPI as a result. This criticism is a 
Misconceptions about the CPI

  Monthly Labor Review • August 20

fundamental misunderstanding of the hedonic method, 

and it ignores the fact that the introduction of all hedonic 

quality adjustments since 1999 has had only a very small 

impact on the overall CPI.

Americans will be understandably concerned if they 

are told that the BLS bases the CPI on subjective and exaggerated assumptions about product quality improvements. They also will be suspicious if told that the BLS 

manipulates nonscientific models to estimate the value of 

quality change. On the contrary, in every aspect of CPI 

construction, the BLS goal is to use objective, rather than 

subjective, methods wherever possible. As stated in a 1998 

paper coauthored by the Commissioner of the BLS, 

For the BLS, the primary task is...to employ the most 

accurate methods available for dealing with quality change and with new goods and outlets. Those 

methods must be rigorous, objective and reproducible, minimizing the role of analyst judgment.26

Why does the BLS adjust for quality change at all? Many 

of the challenges associated with producing a CPI arise because the number and types of goods and services found in 

the market are constantly changing. Over time, the goods 

and services in the CPI samples are being replaced by new 

products or by new models of existing products. Consequently, if the BLS tried to maintain a fixed and unchanging sample for the CPI, that sample would quickly shrink 

to the point where it became unrepresentative of what 

consumers were purchasing. Each time an item in the CPI

sample permanently disappears from the shelves, the BLS

has to choose another item and then has to make some 

determination about the relative qualities of the old and 

replacement items. If it tried to avoid making such quality 

determinations and adjustments—for example, if it treated all new items as identical to those they replaced—significant upward or downward CPI biases would result. As 

stated in the international CPI manual published by the 

International Labor Office (ILO), “Statistical offices must 

pay close attention to the treatment of quality change and 

try to make explicit adjustments whenever possible.”27

To take the most straightforward example of quality 

adjustment, which the CPI handles automatically, suppose 

the maker of a 1.5-ounce candy bar selling for 75 cents 

replaces it by the same brand of candy bar, still selling for 

75 cents, but weighing only 1.0 ounce. If the shrunken 

size is ignored, it looks like the price hasn’t changed. The 

CPI, however, prices candy and most other food items on 

a per-ounce basis and would automatically record a 50-

percent increase in the quality-adjusted price of the item, 

from 50 cents per ounce to 75 cents per ounce.

Another example of how the need for quality adjustment arises is a hypothetical (but plausible) situation in 

which the CPI has been tracking the price of a specific 

model of 32-inch standard-definition color television at 

a certain store. If the store no longer sells that model, the 

CPI data collector will find a replacement model to price 

each period thereafter. In the event that the store has decided to sell only high-definition televisions (HDTVs), one 

of those will necessarily be selected as the replacement. In 

that case, the replacement television may cost 4 times the 

price of the previous standard-definition model. It would 

be unreasonable to treat this rise in price as a sudden fourfold increase in cost, given that the HDTV model has a 

larger screen size, a higher resolution picture, and other 

enhanced features. The BLS must make some estimate of 

how much of the price difference is due to the improved 

quality associated with the HDTV model.

The BLS uses a number of methods for quality adjustment in the CPI, ranging from the simplest (for example, 

ignore the difference in quality if the new and old items 

are sufficiently similar), to the indirect (assume that the 

quality-adjusted price change is the same as the average 

change observed for other items in the sample), to the 

complex (for example, use manufacturers’ production cost 

information to adjust automobile prices each year when 

new models are introduced).28 For a small number of CPI

components, the BLS employs hedonic regression models in dealing with product replacements. Each method 

can and does lead to quality adjustments in either direction, because the new items in the sample can be of either 

higher or lower quality than the products they replace, as 

the aforementioned candy bar and television examples 

demonstrate.

Perhaps because of its name, hedonic regression modeling has received the fiercest criticism from outside the 

academic community. In attacking hedonics, however, 

some commentators seem actually to be objecting to the 

entire concept of quality adjustment in the CPI. That line 

of attack may be based on a false impression that, prior 

to the introduction of hedonic models, the BLS essentially ignored quality improvements and new goods.29 The 

commentators do not aim their criticism at the hedonic 

method of estimating quality differences; instead, they 

criticize the BLS for taking estimated quality differences 

into account at all. When they object to the BLS “hedonic” 

adjustments, they usually make no reference to how the 

hedonic modeling is carried out, even in general terms.

To repeat, the difference in quality between old and 

new items must be addressed in producing a CPI, and he-
Monthly Labor Review • August 2008 

donic modeling is just one method that the BLS uses to 

determine what portion of a price difference is viewed by 

consumers as reflecting quality differences.

The concepts behind hedonic adjustment have been 

frequently misconstrued, and some authors seem to focus 

on the term “hedonic,” which is derived from the Greek 

word for pleasure. These authors associate the method 

with a sort of calculation of the pleasure arising from the 

use of a good. Certainly, when the hedonic method was 

developed in the 1930s, it would have been helpful if a 

more descriptive name had been chosen.30

In fact, hedonic regression has nothing to do with 

calculating or estimating the amount of pleasure a consumer receives by using an item. Actually, the term refers 

to the use of a statistical procedure called multiple regression analysis, in which the market valuation of a feature is 

estimated by comparing the prices of items with and without that feature. For example, the CPI hedonic analysis 

of television prices calculates, at a given point in time, 

the percent difference in market prices associated with 

an additional inch of screen size. Then, if a television is 

replaced by one with a larger screen, the CPI commodity analyst for televisions can adjust the observed price 

difference by estimating what the old television would 

have cost had it had the larger screen size. The process 

of estimating these market values is somewhat technical, 

and it can require a significant amount of work assembling and processing data on product prices and characteristics, but many of the dismissive reactions to the 

hedonic method probably are based on its name rather 

than on an understanding of the actual process. The ILO’s 

international CPI manual states, “The hedonic approach 

to quality adjustment can provide a powerful, objective

and scientific method of evaluating changes in quality 

for certain kinds of products.”31

Moreover, quality adjustment, whether based on hedonic methods or not, adjusts prices between the old 

and new good only to the degree that they differ in quality. 

Contrary to what some have claimed, it does not amount 

to “zeroing out” a price change because quality increased. 

When prices are adjusted for quality, there is no reason 

to believe that the price change has been eliminated, and 

the quality-adjusted price change can be either less than 

or greater than the unadjusted price change, depending 

on whether quality increased or decreased. That statement 

holds true regardless of the method used to adjust for 

quality changes.

Critics often have dramatically misinterpreted both 

the extent and the impact of the CPI’s expansion of hedonic analysis over the last decade. The total CPI weight 

for all products subject to hedonic adjustment is about 32 

percent, but almost all of this total is accounted for by 

shelter and apparel items, for which the BLS has used hedonic models for roughly two decades. Personal computers, microwave ovens, televisions, and other commodities 

for which hedonic models were more recently introduced 

have a combined weight of only about 1 percent in the 

CPI.

It is also important to emphasize that the BLS makes 

hedonic adjustments for declines, as well as improvements, in quality. The CPI price indexes for shelter include 

hedonic adjustments for the gradual aging of the rental 

housing units in the CPI sample, and those adjustments 

regularly increase the rate of change of the indexes by at 

least 0.2 percentage point per year.32 The hedonic adjustments in apparel have had both upward and downward 

impacts at different points in time and for different categories of clothing.33 As discussed in an article in the 

Monthly Labor Review,

34 the BLS estimates that the hedonic quality adjustments introduced since 1998 have had 

an upward impact in five item categories and a downward 

impact in five. The overall impact of these newly introduced hedonic models has been quite modest and in an 

upward, not downward, direction. To be precise, the use of 

the models has increased the annual rate of change of the 

all-items CPI, but by only about 0.005 percent per year.35

It is clear, therefore, that those who maintain that the BLS 

uses hedonic adjustment to keep the measured rate of inflation in an acceptably low range are wrong about the 

impacts, as well as the motives, of BLS actions.

One last criticism often heard is that hedonic quality adjustment is inappropriate when a consumer places 

no value on the enhanced features of a new product and 

would be equally happy with the old, disappearing good. 

This criticism, typically expressed in the context of personal computers,36 might be stated as “The BLS adjusts the 

price of new computers because they are faster, but I don’t 

need the extra speed. So the BLS is adjusting the price for 

a supposed quality improvement that is worthless to me, 

but that I am forced to purchase.”

So long as new products are successful because they 

offer improvements that are valued by most consumers, 

it would be inappropriate for BLS simply to ignore those 

improvements. Some might argue, for example, that when 

an inexpensive black-and-white television disappears 

from the market, the CPI should treat the full difference 

between its price and the price of a color television as a 

price increase. This approach would be no more reasonable, however, than incorporating a large price decrease 

into the CPI when the Concorde supersonic transport 
Misconceptions about the CPI

10 Monthly Labor Review • August 2008

stopped flying and consumers were forced to switch to 

slower transatlantic flights.

The extreme case of a consumer who places no value on 

improvements does, however, point to a fundamental and 

unavoidable problem affecting the CPI of every nation. This 

problem results, not from hedonic modeling or any other 

type of quality adjustment, but from changes in the variety 

of products that are available to consumers. A hypothetical 

consumer who does not value any extra processing speed 

may prefer a computer with a slower and less expensive 

processor even if the new computer is cheaper than the old 

computer, because a new computer with the less expensive 

processor would be cheaper still. The inability to purchase 

that slower, cheaper computer is a loss to that consumer. 

The problem can be seen more clearly when a product is no 

longer sold and no easy replacement exists, thus reducing 

the variety of products that consumers may purchase. For 

example, when a soft drink such as Pepsi Edge or CocaCola C2 disappears from the market, purchasers are worse 

off than they would be if the product were still available, 

and this type of loss is not accounted for in any CPI.

By the same token, an increase in product variety is a 

benefit to consumers that also is not accounted for by any 

CPI. The Boskin commission pointed to the increased variety of restaurants as an example of a consumer benefit that 

does not enter into the calculation of the CPI. The introductions of new classes of products such as MP3 players or 

DVD players are additional examples. Consumer losses and 

consumer benefits do not occur only when the BLS makes 

quality adjustments; rather, they occur anytime the variety 

of available products increases or decreases. Whether the 

change in variety leads the CPI to overstate or understate 

changes in the cost of living depends on whether product 

variety, broadly defined, has decreased or increased.

Rental equivalence

In 1983, the BLS shifted the treatment of homeownership in the CPI-U to rental equivalence. The rental equivalence method is grounded in economic theory, receives 

broad support from academic economists, and is the most 

widely used method among the member nations of the 

Organization for Economic Cooperation and Development (OECD).37 The U.N. System of National Accounts 

1993 guidelines recommend using the method for measuring household consumption, and it is also used in constructing international comparisons of living standards.38

Nevertheless, on the surface, measuring homeowner costs 

by rental equivalence is somewhat counterintuitive, leading some to be concerned that the CPI is mismeasuring 

shelter price inflation.

The CPI for owners’ equivalent rent of primary residence (OER) is based on estimating the market rents for 

owner-occupied housing units.39 The cost of homeownership is treated as what economists call an opportunity 

cost: the amount owner-occupants would receive if they 

did not consume the services of their homes, but instead 

rented the homes out. In essence, the BLS measures the 

value of shelter as the amount of money people give up by 

using it. For renters, that means the amount they pay for 

renting the home. For homeowners, it means the amount 

they lose by not renting out their house. Although most 

CPI critics of rental equivalence have not set forth alternatives for how the homeownership component should 

be constructed, they all object to the exclusion of house 

prices from the CPI.

Using house prices instead of rents to measure homeowner cost is known as the asset, or acquisitions, approach.40 Such an approach has some intuitive appeal and 

is similar to the treatment of any other CPI commodity. 

Its long-recognized flaw, however, is that owner-occupied 

housing combines both consumption and investment elements—and does so to a much greater degree than it does 

other goods and services in the CPI. As has routinely been 

noted by magazine writers, creators of television commercials, and investment advisers, a house is frequently a 

family’s major investment. The CPI is designed to exclude 

investment items, and real estate is one of these exclusions, along with stocks, bonds, and whole-life insurance. 

The logic behind excluding house prices from the CPI is 

suggested by the fact that homeowners are often pleased 

when the price of their housing assets increases, as they 

are when stock prices rise, whereas consumers are seldom 

pleased when the prices of food, energy, or other consumer goods rise. Currently, the squeeze many homeowners 

feel as home values decline while the prices of food and 

gasoline rise is evidence that simply inserting home prices 

in the CPI-U—which would lower the estimated rate of 

inflation—would be inappropriate.

Nearly a half-century ago, the Price Statistics Review 

Committee (commonly referred to as the Stigler Committee, in honor of its chair, Nobel Prize-winning economist George Stigler) of the National Bureau of Economic 

Research concluded, “If a satisfactory rent index for units 

comparable to those that are owner-occupied can be developed, this committee recommends its substitution in 

the CPI for the asset approach for prices of new houses 

and related expenses.”41

Since then, rental equivalence has continued to be supported by each of the prominent panels and agencies that 
Monthly Labor Review • August 2008 11

have reviewed the CPI since the Stigler Committee. In 

1996, the General Accounting Office (now the Government Accountability Office) wrote,

We asked 10 experts their views on whether the rental 

equivalence method made the CPI more [suitable] or 

less suitable as a cost-of-living index. All 10 were expert in measuring housing costs and were very familiar 

with the CPI housing component. All of the housing 

measurement experts agreed that the adoption of the 

rental equivalence method made the CPI more suitable for use as a measure of the cost of living.42

The 1996 “Boskin Commission” supported the rental 

equivalence approach to homeownership, even arguing 

that the CPI treatment of owner-occupied housing should 

be extended to automobiles and all other durable goods.43

More recently, the 2002 report of the National Research 

Council panel states, “for long-lived items like automobiles or houses...one must use not the purchase price but 

the consumption price” and “as is the current practice with 

housing, we believe that using rental rates is probably the 

best option.”44

It is often incorrectly assumed that the introduction 

of OER lowered the growth rate of the shelter index in 

the CPI-U. Chart 1 compares the CPI-U with the CPI-W, 

which continued to employ the old homeownership approach until January 1985. Primarily because interest rates 

moved sharply downward during 1983 and 1984, the increase in the cost of homeownership as measured by rental 

equivalence in the CPI-U was greater than the increase as 

measured by the old approach used in the CPI-W.

Although no one can accurately reconstruct an index 

under the old approach, it is frequently asserted that the 

CPI series for OER understates the long-run growth of 

homeownership costs.45 Evidence to the contrary is found 

in the National Association of Realtors (NAR) series on 

the monthly principal and interest payment required to 

purchase a median-priced existing home in the United 

States. That series is used in the construction of the NAR’s 

well-known housing affordability index. Like the pre-1983 

BLS methodology, it goes beyond a simple house price 

measure by reflecting the powerful effect of interest rate 

movements.46 Between the years 1983 and 2007, the 

NAR monthly payment series rose by 79 percent, much 

less than the CPI OER series increase of 140 percent. Of 

course, any series reflecting home prices will be more volatile than OER and likely will move differently from OER

over any given period. In the long run, however, there is no 

evidence that OER is downwardly biased relative to some 

reasonable alternatives for measuring the cost of shelter 

for homeowners.47

As mentioned in a later section of this article, some of 

the criticisms of the CPI may arise from a distinction between the express goals of that index and the uses that some 

critics wish to make of it. During periods such as the recent 

real-estate boom, commentators observed the rapid runup 

in housing prices relative to the prices of other investments, 

and some may have been frustrated that this asset’s inflation did not immediately or directly affect the CPI, which 

is the most closely followed overall measure of inflation. 

The fact that the rise and fall of house prices will affect the 

CPI only indirectly, through rents, is not an indication of a 

flaw in BLS methodology, however; rather, it flows from the 

CPI’s objective of measuring changes in the cost of living.

Core inflation

The widely repeated idea that Social Security and other 

Federal Government benefits are updated by an index that 

does not include food and energy is simply not true. This 

misconception arises because of the heavy emphasis that 

policymakers, the media, and other economic observers 

place on the CPI-U for all items less food and energy, which 

has been published by the BLS since 1977. This index is 

widely referred to as the “core” CPI-U. For convenience, we 

will sometimes use that term here, but “core” is almost never 

employed by the BLS in its press releases and published 

tables. Although, as of March 2008, their long-run levels 

were almost identical, the core CPI-U rose by less than the 

all-items index in 7 of the 9 years beginning in 1999.48

The BLS publishes thousands of indexes each month, 

including the headline all-items index and the index for 

all items less food and energy. As stated earlier, it is the 

all-items index that is used in all significant Federal outlay and revenue programs, including Social Security costof-living adjustments and Federal income tax provisions. 

The Federal Reserve Board makes use of core inflation to 

predict future price changes under the belief that food and 

energy prices are volatile and are subject to price shocks 

that cannot be damped through monetary policy. Although some people question the value of the core index 

in times of rapidly increasing food and energy prices, it is 

nonetheless appropriate for the BLS to publish the data 

and let members of the public and agencies, including the 

Federal Reserve, decide which indexes are most useful for 

their purposes.49

Occasionally, someone will erroneously suggest that the 

core is meant to replace the all-items CPI-U or that the focus 

of reported inflation shifts back and forth between the two 
Misconceptions about the CPI

12 Monthly Labor Review • August 2008

series, depending on which gives a more favorable reading. 

It is easy, however, to verify from the BLS Web site that the 

formats for CPI releases and tables vary only slightly from 

month to month. Page 1 of the CPI news release for March 

2008 is typical.50 After paragraphs on the monthly and 

annual movements of the all-items CPI-U, CPI-W, and CCPI-U, respectively, a paragraph discusses the movements 

of three major aggregates—energy, food, and all items 

less food and energy—in the CPI-U. Energy, the cost of 

which increased 1.9 percent in March 2008, is mentioned 

first, followed by food and all items less food and energy, 

both of whose costs increased 0.2 percent. Table A on page 

1 shows monthly, quarterly, and annual movements on the 

basis of the same three-way breakdown, as well as for eight 

major groups; that table’s format is identical each month. 

Obviously, then, the BLS does not “spotlight” one statistic 

or another each month in an attempt to suppress high or 

volatile inflation rates. Moreover, the relevant formats of 

CPI tables are the same as those used during periods such as 

1991–98, when the all-items CPI usually rose less than the 

index for all items less food and energy.

Although the CPI-U for all items less food and energy 

has been the subject of numerous books and of many articles in academic journals, one crucial point to recognize is 

that the BLS makes no claims about the predictive or analytical value of that index.51 It is just one of many special 

indexes published by the BLS each month, such as indexes 

for all items less medical care, commodities less food, and 

services less rent of shelter. Each of these indexes likely 

serves the needs of some CPI users, but the BLS has no 

position on which of its published indexes, if any, serves as 

the best measure of underlying inflation or the best predictor of future movements in the CPI-U.

Finally, it must again be emphasized strongly that none 

of the prominent legislated uses of the CPI excludes food 

or energy: each year, Social Security and Federal retirement benefits are updated for inflation by the all-items 

CPI-W. Individual income tax parameters and TIPS returns 

are indexed by the all-items CPI-U.

The CPI and perceived inflation

The previous sections have attempted to clear up some misconceptions about the methods employed in constructing 

the CPI. However, criticism often appears to arise primarily 

from a writer’s perception that movements in the CPI are 

 Chart 1. CPI-U shelter index and CPI-W shelter index, January 1980–December 1985

 1980 1981 1982 198

150.

145

140.

135

130.

125.

120.0

115.

110.0

105.

100.0

(January 1980 =100

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct

CPI-U shelter index

Index Index

150.

145

140.

135

130.

125.

120.0

115.

110.0

105.

100.0

CPI-W shelter index

(January 1980 =100

NOTE: The OER measure of owner-occupied housing was introduced into the CPI-U in January 1983 and into the CPI-W i

January 198
Monthly Labor Review • August 2008 1

inconsistent with his or her own observation of inflation. 

This section examines several reasons for these apparent inconsistencies between the index and people’s perceptions.

Some commentators have complained that measured inflation is lower in the United States than in other countries, 

offering this difference as evidence that the growth rate of 

the U.S. CPI is understated. On its face, the argument that 

one can gauge the accuracy of U.S. inflation measures by 

comparing the change in the U.S. CPI with inflation rates 

in other countries seems wrong because each nation’s inflation experience is the result of its unique economic circumstances. Still, for argument’s sake, the very assertion that U.S. 

rates are unreasonably low compared with those of other developed countries is wrong. In fact, as shown in the following tabulation, between 1997 and 2007 the U.S. CPI-U rose 

faster than the CPIs of 16 of the other 29 OECD nations and 

faster than the CPIs of all of the other G-7 nations:52

Country Inflation rate

 Total............................................................... 2.9

G–7 nations........................................................... 1.9

Organization for Economic Cooperation 

and Development....................................................... 3.7

Turkey .................................................................... 33.5

Hungary ................................................................. 7.5

Mexico.................................................................... 7.3

Slovak Republic...................................................... 6.5

Poland..................................................................... 4.5

Iceland.................................................................... 4.2

Ireland .................................................................... 3.6

Greece .................................................................... 3.4

Czech Republic ...................................................... 3.3

Korea ...................................................................... 3.2

Spain ...................................................................... 3.0

Portugal .................................................................. 2.9

Australia ................................................................. 2.8

United States.......................................................... 2.6

Italy ....................................................................... 2.2

New Zealand.......................................................... 2.2

Netherlands............................................................ 2.2

Luxembourg ........................................................... 2.2

Canada ................................................................... 2.1

Denmark ................................................................ 2.1

Norway................................................................... 1.9

Belgium .................................................................. 1.9

Austria.................................................................... 1.8

United Kingdom .................................................... 1.6

France..................................................................... 1.6

Finland ................................................................... 1.5

Germany................................................................. 1.4

Sweden ................................................................... 1.2

Switzerland............................................................. .8

Japan....................................................................... –.2

Similarly, between the first quarters of 2007 and 2008 the 

U.S. CPI-U rose by more than the CPIs of 20 of the other 

29 OECD nations and by more than all of the other G-7

nations.53

Earlier, it was mentioned that the CPI is just one of 

many indexes that can be used to measure different aspects of inflation. As a measure of the change in consumer 

prices, the CPI by design excludes many products from 

its scope, such as industrial goods and investment assets. 

Also, the CPI’s fundamental purpose is to measure current 

price change and not to measure underlying or incipient 

inflationary pressure. Consequently, the CPI does not reflect all inflation signals, such as may be found in futures 

market prices or public announcements of planned price 

increases. Finally, the CPI is based on average consumer 

expenditures, and no single index can meet every need or 

provide a totally accurate measure of the inflation faced 

by every individual. Often, criticism of the CPI implicitly 

relates to these aspects of the index’s design, rather than 

to the ways in which the BLS collects or processes price 

data.

Many consumers feel that their personal inflation experiences are not reflected in the movements of the CPI-U. 

These experiences can actually be borne out because some 

consumers spend more than others on items with rapidly 

increasing prices. The CPI-U is constructed from expenditures averaged over many consumers; as a consequence, 

some consumers will face a lower rate of inflation than 

that indicated by the CPI-U, and others will face a higher 

rate of inflation. For example, earlier it was noted that the 

wage earner and clerical worker families represented in 

the CPI-W allocate a higher-than-average share of their 

expenditures to gasoline. Partly for this reason, the CPI-W

rose 4.3 percent over the 12 months ending March 2008, 

compared with 4.0 percent for the CPI-U. Further, BLS data 

from the CE show that low-income households spend a 

greater-than-average percentage of their expenditures on 

food at home and on gasoline and motor oil. By income 

quintile, from lowest to highest, 15.3 percent, 14.1 percent, 

13.0 percent, 12.1 percent, and 9.2 percent of expenditures 

are devoted to food at home and to gasoline and motor 

oil.54 These statistics provide some evidence that the typical household in one of the lower income quintiles may be 

more adversely affected by current inflation than a typical 

household in one of the upper quintiles.55

Another reason for the potential difference between 

the CPI-U and a consumer’s experience of inflation is that 

the prices of many frequently purchased items, especially 

necessities such as food and gasoline, recently have been 

rising more rapidly than the CPI as a whole. Because the 
Misconceptions about the CPI

14 Monthly Labor Review • August 20

CPI is an average of the inflation rates of many different 

items, if some prices are growing more rapidly than the 

CPI, then other prices must be growing more slowly. In 

many cases, the most slowly rising prices are in the categories of consumer durable goods and apparel. In fact, 

the CPI for durables, which include such items as televisions and computers, fell slightly over the year ending 

March 2008, as did the index for apparel. Of course, by 

their nature, those items are purchased less frequently 

than food and energy items. For a family that had no immediate plans to purchase a new television or computer 

in March 2008, the price declines of those products over 

the previous 12 months probably would be less important 

than the 26.0-percent increase in the price of gasoline, the 

48.4-percent rise in the price of fuel oil, the 14.7-percent 

price increase for bread, and the 13.3-percent price rise 

for milk. Similarly, although most families purchase apparel during any given year, in many weeks their purchases 

will be concentrated in food and fuel, and in those weeks 

they probably experienced price increases higher than the 

increases reported for the all-items CPI. Nevertheless, the 

BLS cannot exclude items from the CPI simply because 

they are purchased infrequently: all goods and services 

contribute to the CPI in proportion to consumer spending 

on them, as described earlier.

Another possibility explaining individual differences 

in the experience of inflation is “loss aversion,” described 

succinctly by David Leonhardt in a recent New York Times

editorial:

Price increases are simply more noticeable—more 

salient, as psychologists would say—than price decreases. Part of this comes from the notion of loss 

aversion: human beings dislike a loss more than 

they like a gain of equivalent size. If you have to sell 

your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs 

$2.83 a pound, but you didn’t notice that oranges are 

31 percent cheaper than they were a year ago.56

Leonhardt’s account seems possible, although a search of 

the literature failed to turn up any research specifically addressing the degree to which perceptions about the CPI 

are affected by loss aversion.

Does the CPI understate inflation? 

Up to now, this article has addressed each of the major 

recent criticisms of the CPI and has argued that those 

criticisms are based on misunderstandings of the methods 

used to construct the index. Each of the improvements 

made to the CPI over the years is based on sound economic theory and years of research by academicians and 

BLS economists. The methods continue to be reviewed by 

outside commissions and advisory panels, and they are 

widely used by statistical agencies of other nations.

This section examines the large quantitative impacts 

that some writers have attributed to the changes in CPI 

methodology that have been adopted over the years. One 

widely cited alternative index is based on an estimate that 

changes to the CPI since 1983 have lowered its growth 

rate by at least 7 percentage points per year. The use of 

the geometric mean alone is stated to have lowered the 

CPI growth rate by 3 percentage points, and other BLS 

changes, such as the use of hedonic models and OER, supposedly have lowered the growth rate by an additional 4 

percentage points.57

Each of these estimates of the impact of BLS changes is 

inconsistent with the empirical evidence. As noted earlier, 

the BLS has computed indexes showing that the use of the 

geometric mean formula has reduced the growth rate of the 

geometric mean of the CPI by only -0.28 percentage point 

per year, not 3 percentage points. Also discussed earlier, BLS

analyses have shown that if the implementation of hedonic 

adjustment models since 1999 has had any net downward 

effect, it is very small. Hedonic adjustment models implemented subsequent to 1983, but prior to 1999, have almost 

certainly had an upward effect. Among the methodological 

changes examined in this article, that leaves only the shift 

to rental equivalence, and it is entirely implausible that its 

impact could be as large as 4 percentage points per year. Earlier, it was shown that from 1983 to 2007 the CPI for OER

rose faster than an alternative index that, like the pre–1983 

BLS homeownership index, is based on both house prices 

and interest rates. Another piece of evidence comes from 

an analysis published in the Monthly Labor Review in 1999 in 

which BLS economists Kenneth J. Stewart and Stephen Reed 

compared the historical published CPI-U with an index created in accordance with current BLS methodologies.58 For 

the years 1978–82, a period that witnessed very rapid increases in both house prices and interest rates, Stewart and 

Reed estimated that the use of rental equivalence would 

have had an average annual impact on the CPI-U of only 

–0.86 percentage point. Moreover, with house prices now 

declining in many parts of the country, one would expect 

that if the BLS were using the pre-1983 homeownership 

method, it would yield a lower, not higher, current measure 

of shelter inflation.

Another way of evaluating the purported 7-percent 

difference is by comparing it with other information. If the 
Monthly Labor Review • August 2008 1

CPI were understated by 7 percentage points annually, then, 

from April 1998 to April 2008, prices would have risen by 

155 percent, not 32 percent as reported by the CPI-U. Table 1 

shows that a 7-percent difference implies unrealistic changes 

in price and income. First, the table presents examples of average prices published by the BLS from each of the six CPI

grocery store food groups, along with four energy series. For 

example, the average price of a gallon of whole milk was 

$2.67 in April 1998 and $3.80 in April 2008. If the price had 

increased by 155 percent over that period, it would now be 

$6.81 per gallon. Similarly, if the average price of 2 liters of 

nondiet cola had increased by 155 percent over those 10 years, 

it would now be $2.72, more than twice as high as the actual 

April 2008 average price of $1.33. Of the 10 average prices 

listed in table 1, only two—gasoline and fuel oil—increased 

by such a large percentage.

Unfortunately, similar price comparisons cannot be 

made in other sectors, because the BLS publishes average price levels only for food and energy. Nevertheless, 

while no one would claim that all consumer goods and 

services increased by 155 percent between 1998 and 2008, 

the validity of the purported 7-percent difference is called 

into question by the fact that most prices actually rose 

by much less than 155 percent, even within the food and 

energy components, in regard to which inflation recently 

has been a major public concern.

 Table 1 also examines the growth rate of two measures 

of homeowner costs: the NAR measures of median singlefamily house prices and the monthly principal and interest payment on the median house. The table shows that 

both measures rose by much less than 155 percent. That 

is, although some have cited the fact that the CPI does not 

reflect rapidly rising house prices as a major flaw in CPI 

methodology, the alternative index for goods and services as 

a whole rises much faster than the NAR measures of both 

house prices and mortgage cost.

Finally, table 1 presents two measures of real, inflationadjusted incomes in the United States: the BLS measure of 

real average weekly earnings of production and nonsupervisory workers, and the BEA measure of real per-capita 

personal disposable income. The last column shows the 

hypothetical effect of deflating that income by 155 percent.59 The implied result is an extremely severe decline 

in real income between 1998 and 2008. For example, one 

would conclude that real per-capita personal disposable 

income declined by more than 40 percent over the 10 

years examined. This is an entirely unrealistic conclusion; 

by comparison, the BEA reports that real per-capita personal disposable income declined by just 26 percent during the Great Depression.

IT IS HOPED THAT THIS ARTICLE HAS PUT TO REST 

some of the misconceptions and myths about the CPI. 

It is a myth that the BLS reduced the growth rate of the 

CPI by assuming that hamburger is substituted for steak. 

It is a myth that the use of hedonic quality adjustment 

has substantially reduced the growth rate of the CPI. It 

is a myth that the 1983 adoption of owner’s equivalent 

rent systematically reduced the growth rate of the CPI

shelter index. Finally, it is a myth that Social Security 

payments are updated by a CPI that does not include food 

or energy.

A number of other points also can be made. First, the 

sizes and effects of the changes implemented by the BLS 

have been overestimated by critics. The introduction of the 

geometric mean formula to account for product substitution has decreased the rate of change of the CPI by less 

than 0.3 percentage point annually, not by 3 percentage 

points annually as some have claimed. In the case of owner’s equivalent rent, it is not at all clear that the long-run 

impact has even been in a downward direction. Hedonic 

quality adjustments introduced in the last 10 years have 

had a very small impact on the all-items CPI.

Second, the changes implemented by the BLS that 

some critics construe to be a response to short-term political pressure were, in fact, the result of analysis and recommendations made over a period of decades, and those 

changes are consistent with international standards for 

statistics. The problem of how to adjust for quality differences when new goods appear was recognized by the BLS

Commissioner when consumer price indexes were first 

published.60 The solution known as hedonic estimation 

was developed no later than 1939, and its use in the CPI

was recommended in 1961. Five of the G-7 nations use hedonic estimation, as do at least 11 of the OECD nations.61

The BLS approach is consistent with guidelines developed 

by the OECD.

62 The geometric mean price index was developed in 1865, was recommended by the International 

Labor Office, and was being evaluated for use in the U.S. 

CPI well before the Boskin Commission was formed.63 It 

is widely used by Eurostat and OECD countries. The use of 

owner’s equivalent rent was recommended in 1961 by the 

Stigler Committee and later by the General Accounting 

Office; according to the OECD, owner’s equivalent rent is 

the most common method that its member countries use 

to measure the cost of shelter for homeowners.

Third, the BLS routinely publishes details about its 

methods and about changes to those methods. In the BLS

Handbook of Methods, the chapter on the CPI contains information on the index’s methods of construction, as well 

as on its history, uses, limitations, precision, and other top-
Misconceptions about the CPI

16 Monthly Labor Review • August 20

ics. In addition, the CPI Web site includes a wide variety 

of specialized information, such as articles on hedonic 

regression models in apparel, guidelines for new-vehicle 

quality adjustment, fact sheets on the methods used to 

generate selected CPI components, details about the use 

of intervention analysis in seasonal adjustment, and a 

comparison of the CPI and the PCE price index. The BLS 

also maintains information offices at both its national and 

regional offices in order to respond to questions from the 

public.

Finally, the CPI is not, and can never be, a perfect index. 

Moreover, all of the topics raised in the recent commentary on the CPI—including the methods for dealing with 

consumer substitution, quality change, and owner-occupied housing—are critically important to the accuracy of 

the index. The very existence of the CPI methodological 

changes discussed here attests to the fact that the BLS 

must always be working to enhance the index. The BLS 

benefits from the work of academics and others who 

identify ways in which the CPI can be improved. The BLS

also benefits when the public understands how the CPI

is constructed and what the index’s strengths and limitations are. It is hoped that this article will help increase 

that public understanding. 

Notes

ACKNOWLEDGMENTS: The authors thank Ralph Bradley, Rob Cage, 

Mike Horrigan, Patrick Jackman, Walter Lane, Phil Rones, Owen 

Shoemaker, Ken Stewart, and Randy Verbrugge for helpful comments 

and suggestions, and Aylin Kumcu, Steve Reed, and Mick Silver for 

providing or tabulating data.

1 Marshall Reinsdorf and Jack Triplett, “A Review of Reviews—Ninety 

Years of Professional Thinking About the Consumer Price Index,” in Erwin 

Diewert, John Greenlees, and Charles Hulten, eds., Price Index Concepts and 

Measurement (Chicago, University of Chicago Press, forthcoming).

2 See, for example, Margaret H. Hogg, “Revising the Wage Earners’ Cost-of-Living Index,” Journal of the American Statistical Association, March 1934, pp. 120–24. 

3 The Panel on Conceptual, Measurement, and Other Statistical 

Issues in Developing Cost-of-Living Indexes. Part of the Committee 

on National Statistics of the National Research Council, the panel produced the volume At What Price? Conceptualizing and Measuring Costof-Living and Price Indexes, edited by Charles L. Schultze and Christopher Mackie (Washington, DC, National Academy Press, 2002).

4 The publication is on the Internet at www.bls.gov/cpi/cpifaq.htm 

(visited Aug. 28, 2008).

 Table 1. Comparisons of prices and incomes, April 1998 and April 2008

Price and income

April 2008

BLS average food prices:

 Bread, white, pan,1 per lb. ................................................................................ $0.863 $1.373 $

 Milk, fresh, whole, fortified, per gal. ........................................................... 2.668  3.7

 Tomatoes, field grown, per lb. ...................................................................... 1.398 1.

 Peanut butter, creamy, all sizes, per lb. ...................................................... 1.808 1.980  4

 Cola, nondiet, per 2 liters.................................................................................. 1.065 1.329 

 All uncooked beefsteaks, per lb. ..................................................................  3.665 

BLS average energy prices:

 Gasoline, all types, per gal. .............................................................................. 1.106  3.491 

 Fuel oil #2, per gal. ............................................................................................... .915  3.

 Utility (piped) gas, 100 therms ...................................................................... 65.874 142.

 Electricity, per 500 kwh...................................................................................... 45.739  62

National Association of Realtors housing costs:2

 Median price of single-family house.......................................................... 132,300 200,700

 Principal and interest payment on median-priced house................  79  

Real incomes:2 

 Bureau of Economic Analysis disposable personal income per

 capita, quarter 1, 1998, dollars (1998 and 2008 figures 

 for quarter 1)..................................................................................................... 22,753 27,

 BLS average weekly earnings, April 1998 dollars..................................  

April 1998

Reported values April 2008 updates of

1998 values, assuming

a 155-percent price

increase

1

 Bread baked in a pan for a specific shape of loaf (for example, 

sandwich bread). 2

 All 2008 values are preliminary and subject to revision. 

SOURCES: Bureau of Labor Statistics, National Association of Realtors, 

and Bureau of Economic Analysis publications and authors’ calculations.
Monthly Labor Review • August 2008 1

5 See BLS Handbook of Methods (Bureau of Labor Statistics, June 

2007), chapter 17, pp. 2–3, on the Internet at www.bls.gov/opub/

hom/pdf/homch17.pdf (visited Aug. 28, 2008). 

6 The description in this paragraph necessarily ignores certain exceptions and special cases. The CPI sample for airline fares, for example, 

is selected with data from the Department of Transportation, not the 

Telephone Point-of-Purchase Survey.

7 A description of the TIPS program can be found at www.

treasurydirect.gov/instit/annceresult/tipscpi/tipscpi.htm (visited Aug. 28, 2008). 

8 BLS research on this topic is reported by, for example, Robert 

Gillingham, “Measuring the Cost of Shelter for Homeowners: Theoretical and Empirical Considerations,” Review of Economics and Statistics, May 1983, pp. 254–65, and Robert Gillingham and Walter Lane, 

“Changing the treatment of shelter costs for homeowners in the CPI,” 

Monthly Labor Review, June 1982, pp. 9–14, on the Internet at www.

bls.gov/opub/mlr/1982/06/contents.htm (visited Aug. 28, 2008).

9 Data Quality Assessment Framework (International Monetary 

Fund, August 2006), on the Internet at dsbb.imf.org/vgn/images/

pdfs/dqrs_cpi.pdf (visited Aug. 29, 2008); see especially p. 20.

10 Compendium of HICP reference documents (Luxembourg, Eurostat, 

February 2001), p. 59, on the Internet at epp.eurostat.ec.europa.

eu/cache/ITY_OFFPUB/KS-AO-01-005/EN/KS-AO-01-005-EN.PDF (visited 

Aug. 28, 2008). Many European nations produce both a CPI and an 

HICP, with some differences in scope and methodology. Notably, HICP

coverage excludes owner-occupied housing.

11 The 30 countries are the 27 members of the European Union, plus 

Iceland, Norway, and Turkey. The national HICP practices are available 

on the Eurostat Web site, on the Internet at epp.eurostat.ec.europa.

eu/portal/page?_pageid=2714,1,2714_61582099&_dad=portal&_

schema=PORTAL#SDDS (visited Aug. 28, 2008). A 2002 study of 27 

countries from the Organization for Economic Cooperation and Development (OECD) showed that, at that time, 12 (including the United 

States) used the geometric mean as the exclusive or primary formula in 

their national CPIs. (See Comparative Methodological Analysis: Consumer 

and Producer Price Indices, Volume 2002, Supplement 2 (OECD, 2002), 

pp. 42–43, on the Internet at www.oecd.org/dataoecd/60/61/1947731.

pdf (visited Aug. 28, 2008).)

12 The focus here is on the BLS’s primary justification that the geometric mean takes into account consumer substitution behavior. There 

are, however, other statistical justifications for the formula that do 

not involve substitution. (See, for example, Brent R. Moulton, “Basic 

components of the CPI: estimation of price changes,” Monthly Labor 

Review, December 1993, pp. 13–24; on the Internet at www.bls.gov/

opub/mlr/1993/12/contents.htm (visited Aug. 28, 2008).)

13 As discussed in the previous section, it is the C-CPI-U that reflects observed substitution across CPI item categories, but critics have 

focused their attention on the CPI-U and CPI-W.

14 For more examples of substitution, see “Planned Change In The 

Consumer Price Index Formula April 16, 1998” (Bureau of Labor Statistics, Oct. 16, 2001), on the Internet at www.bls.gov/cpi/cpigm02.

htm (visited Aug. 28, 2008).

15 Due to data constraints, the formula used in the CPI prior to 

1999, and still used within some item categories, is a modified version 

of the textbook Laspeyres formula.

16 Two examples are Robert Pollak, The Theory of the Cost of Living 

Index (New York, Oxford University Press, 1989), p. 13, and P. R. G. 

Layard and A. A. Walters, Micro-Economic Theory (New York, McGrawHill, 1978), p. 157. For a more recent statement of the result in an introductory textbook, see Paul A. Samuelson and William D. Nordhaus, 

Economics, 18th ed. (New York, McGraw-Hill/Irwin, 2005), p. 441.

17 The geometric mean price index was first described in 1865 by 

William Stanley Jevons in “On the Variation of Prices and the Value 

of the Currency since 1782,” Journal of the Statistical Society of London, June, pp. 294–320, appendix pp. 1–4. Studies of the bias that is 

introduced into a price index by not considering substitution include 

Marilyn E. Manser and Richard J. Macdonald, “An Analysis of Substitution Bias in Measuring Inflation, 1959–85,” Econometrica, July 

1988, pp. 909–30; Steven D. Braithwait, “The Substitution Bias of the 

Laspeyres Price Index: An Analysis Using Estimated Cost-of-Living 

Indexes,” American Economic Review, vol. 70, no. 1, 1980, pp. 64–77; 

and Nicholas N. Noe and George M. von Furstenberg, “The Upward 

Bias in the Consumer Price Index Due to Substitution,” Journal of Political Economy, vol. 80, no. 4, 1972, pp. 1280–86. 

18 Expressed as an index set originally at 100, the Laspeyres index 

after the price increase would equal 100 × (10/4), or 250. 

19 The geometric mean index in this example would be 100 × (8/4), 

or 200. Implicitly, the geometric mean formula assumes no change in 

the shares of spending on the different items. Thus, both before and after the price change, the consumer spends half of her funds on chocolate bars and half on peanut bars.

20 Kenneth V. Dalton, John S. Greenlees, and Kenneth J. Stewart, 

“Incorporating a Geometric Mean Formula into the CPI,” Monthly 

Labor Review, October 1998, pp. 3–7; on the Internet at www.bls.gov/

opub/mlr/1998/10/contents.htm (visited Aug. 28, 2008). That article 

also discusses the CPI components for which the BLS did not adopt the 

geometric mean formula. The judgment was made that, within those 

components, such as hospital services and utility natural gas, consumers 

were less likely to shift their purchases in response to price changes.

21 See subsequent section “Does the CPI understate inflation.” 

22 This component of the CPI actually includes many other products, 

such as sherbet, sorbet, and popsicles. The example also ignores many computational details, such as the sample weighting of individual prices.

23 Assuming that the base value of the index is 100, the Laspeyres index 

for the second period will be one-half the sum (the arithmetic average) of 

(100 + 8.6) and (100 – 4.2), or 102.2. The geometric mean index would be 

the square root of the product of (100 + 8.6) and (100 – 4.2), or 102.0.

24 David S. Johnson, Stephen B. Reed, and Kenneth J. Stewart, “Price 

measurement in the United States: a decade after the Boskin Report,” 

Monthly Labor Review, May 2006, pp. 10–19; on the Internet at www.

bls.gov/opub/mlr/2006/05/contents.htm (visited Aug. 28, 2008). Unpublished results for the longer period from December 1998 to December 2007 show an average difference of 0.27 percentage point per year.

25 Ibid., p. 3.

26 Katharine G. Abraham, John S. Greenlees, and Brent R. Moulton, “Working to Improve the Consumer Price Index,” Journal of Economic Perspectives, winter 1998, pp. 27–36.

27 Consumer Price Index Manual: Theory and Practice (Geneva, International Labor Office, 2004), paragraph 1.255, on the Internet at 

www.ilo.org/public/english/bureau/stat/guides/cpi/index.htm (visited Aug. 28, 2008).

28 For a detailed description of BLS quality adjustment procedures, 

see Brent Moulton and Karin E. Moses, “Addressing the Quality 

Change Issue in the Consumer Price Index,” Brookings Papers on Economic Activity, vol. 28, no. 1, 1997, pp. 305–49; or John S. Greenlees, 

“Consumer Price Indexes: Methods for Quality and Variety Change,” 

Statistical Journal of the United Nations Economic Commission for Europe, 

vol. 17, no. 1, 2000, pp. 59–74.

29 This particular misconception has been frequent in the history of 

commentary on the CPI, as discussed, for example, by Jack E. Triplett, 
Misconceptions about the CPI

18 Monthly Labor Review • August 2008

“Quality Bias in Price Indexes and New Methods of Quality Measurement,” in Zvi Griliches, ed., Price Indexes and Quality Change: Studies 

in New Methods of Measurement (Cambridge, MA, Harvard University 

Press, 1971), pp. 180–214.

30 The term apparently was introduced by Andrew Court, “Hedonic 

Price Indexes with Automotive Examples,” in The Dynamics of Automobile 

Demand (New York, The General Motors Corporation, 1939), pp. 99–117.

31 International Labor Office, Consumer Price Index Manual, paragraph 1.253, emphasis added.

32 Louise L. Campbell, Updating the Housing Age-Bias Regression 

Model in the Consumer Price Index, CPI Detailed Report (Bureau of 

Labor Statistics, November 2006), on the Internet at www.bls.gov/

cpi/cpiagebias.pdf (visited Aug. 28, 2008); and Robert Poole, Frank 

Ptacek, and Randal Verbrugge, Treatment of Owner-Occupied Housing 

in the CPI (Bureau of Labor Statistics, December 2005), on the Internet 

at www.bls.gov/bls/fesacp1120905.pdf (visited Aug. 28, 2008).

33 Craig Brown and Anya Stockburger, “Item replacement and quality change in apparel price indexes,” Monthly Labor Review, December 

2006, pp. 35–45; on the Internet at www.bls.gov/opub/mlr/2006/12/

contents.htm (visited Aug. 28, 2008).

34 Johnson, Reed, and Stewart, “Price measurement in the United 

States.”

35 Ibid., p. 15. This estimate excludes personal computers; in 2003, 

the CPI program implemented a new approach that derives the values of computer attributes from information on the Internet, rather 

than from estimated hedonic regressions. (See “How BLS Measures 

Price Change for Personal Computers and Peripheral Equipment 

in the Consumer Price Index,” on the Internet at www.bls.gov/cpi/

cpifaccomp.htm (visited Aug. 28, 2008).)

36 As noted earlier, the BLS stopped using hedonic quality adjustments for new computers in the CPI in 2003. 

37 The OECD, which is composed mainly of industrialized, developed countries, recently reported that 13 of its 30 members use rental 

equivalence in their national CPIs. The next-most-frequent alternative is simply leaving owner-occupied housing out of the index (8 

countries). (See Ane-Kathrine Christensen, Julien Dupont, and Paul 

Schreyer, “International Comparability of the Consumer Price Index:

Owner-occupied housing,” paper prepared for the OECD seminar 

“Inflation measures: too high—too low—internationally comparable?” Paris, June 21–22, 2005, p. 9, on the Internet at www.oecd.

org/dataoecd/14/18/34987270.pdf (visited Aug. 28, 2008).)

38 International Labor Office, Consumer Price Index Manual, paragraph 

10.14.

39 An alternative to rental equivalence is the user cost of capital, 

defined by the OECD as “the unit cost for the use of a capital asset for 

one period—that is, the price for employing or obtaining one unit of 

capital services. The user cost of capital is also referred to as the ‘rental 

price’ of a capital good, or the ‘capital service price.’ ” (See “Annex 1:

Glossary of Technical Terms Used in the Manual,” Measuring Capital:

OECD Manual (Paris, OECD, 2001), p. 96, on the Internet at www.oecd.

org/dataoecd/61/57/1876369.pdf (visited Aug. 28, 2008).)

40 This approach also would include the costs of additions and alterations, as well as other costs.

41 The Price Statistics of the Federal Government (Cambridge, MA, 

National Bureau of Economic Research, 1961), p. 48.

42 Consumer Price Index: Cost-of-Living Concepts and the Housing 

and Medical Care Components, GAO report GGD–96–166, August 1996, 

p. 17, on the Internet at www.gao.gov/archive/1996/gg96166.pdf 

(visited Aug. 28, 2008).

43 Final Report of the Advisory Commission to Study the Consumer 

Price Index, Print 104–72, 104 Cong., 2 sess. (U.S. Senate, Committee 

on Finance, 1996), p. 53.

44 Panel on Conceptual, Measurement, and Other Statistical Issues 

in Developing Cost-of-Living Indexes, At What Price? p. 72.

45 The previous method had several widely recognized problems. 

(See, for example, “Measurement of Homeownership Costs in the Consumer Price Index Should Be Changed,” PAD–81–12 (General Accounting Office, 1981), on the Internet at archive.gao.gov/f0202/114922.

pdf (visited Aug. 28, 2008).)

46 For recent values of the affordability index, see rodomino.realtor.

org/Research.nsf/Pages/HousingInx (visited Aug. 28, 2008).

47 For recent comparisons of rental equivalence and other alternative homeowner cost indexes, see Randal Verbrugge, “The Puzzling 

Divergence of U.S. Rents and User Costs,” manuscript; and Thesia I. 

Garner and Randal Verbrugge, “The Puzzling Divergence of U.S. Rents 

and User Costs, 1980–2004: Summary and Extensions,” BLS Working 

Paper 409, on the Internet at www.bls.gov/ore/abstract/ec/ec070080.

htm (visited Aug. 28, 2008).

48 The comparison of yearly movements uses December-to-December changes. The levels for the all-items and core CPI-Us in March 2008 

were 213.528 and 214.866, respectively, on a 1982–84 = 100 basis.

49 The Federal Reserve Board also makes use of food and energy 

prices in its deliberations. See, for example, Ben S. Bernanke, “Inflation Expectations and Inflation Forecasting” (Board of Governors of 

the Federal Reserve System, July 10, 2007), on the Internet at www.

federalreserve.gov/newsevents/speech/Bernanke20070710a.htm

(visited Aug. 28, 2008).

50 Visit www.bls.gov/news.release/archives/cpi_04162008.pdf (visited Aug. 28, 2008).

51 Examples of such research include Otto Eckstein, Core Inflation

(Englewood Cliffs, NJ, Prentice-Hall, 1981); Mick Silver, “Core Inflation: 

Measurement and Statistical Issues in Choosing among Alternative Measures,” IMF Staff Papers, vol. 54, June 2007, pp. 163-90; and Theodore M. 

Crone, N. Neil K. Khettry, Loretta J. Mester, and Jason A. Novak, “Core 

Measures of Inflation as Predictors of Total Inflation,” Federal Reserve 

Bank of Philadelphia Working Paper 08–9, May 2008.

52 The list of nations whose CPIs rose more slowly than the U.S. 

CPI includes Canada, America’s largest trading partner, whose average annual inflation rate over the 1997–2007 period was 2.1 percent, 

compared with 2.6 percent for the United States.

53 Historical CPI data are available on the OECD Web site, on the 

Internet at stats.oecd.org/wbos/Index.aspx?querytype=view&query

name=221 (visited Aug. 28, 2008).

54 Derived from Consumer Expenditure Survey, Table 1, “Quintiles of income before taxes: Average annual expenditures and characteristics, 2006,” on the Internet at www.bls.gov/cex/2006/standard/

quintile.pdf (visited Aug. 28, 2008).

55 This evidence cannot be taken as conclusive, however. For example, high- and low-income households may shop at outlets with 

different patterns of price changes. Also, the shares of spending on 

other products with high recent inflation, such as airline fares and college tuition, may be positively correlated with income.

56 David Leonhardt, “Seeing Inflation Only in the Prices That 

Go Up,” The New York Times, May 7, 2008; on the Internet at www.

nytimes.com/2008/05/07/business/07leonhardt.html (visited Aug. 

28, 2008).

57 Visit the Web site www.shadowstats.com/alternate_data (visited 

Aug. 28, 2008).
Monthly Labor Review • August 2008 1

58 Kenneth J. Stewart and Stephen Reed, “CPI research series using current methods, 1978–98,” Monthly Labor Review, June 1999, pp. 

29–38; on the Internet at www.bls.gov/opub/mlr/1999/06/contents. 

htm (visited Aug. 28, 2008). The BLS periodically updates that research 

index, which also is available on the Internet, at www.bls.gov/cpi/

cpirsdc.htm (visited Aug. 28, 2008).

59 The BEA deflates per-capita disposable personal income by its 

PCE price index, whereas the BLS deflates average weekly earnings by 

the CPI-W. However, the differences in measured price change among 

the CPI-U, CPI-W, and PCE index are very small in comparison to a price 

movement of 155 percent.

60 Royal Meeker, “The Possibility of Compiling an Index of the Cost 

of Living,” American Economic Review, March 1919, pp. 108–17. 

61 Information on the use of hedonics was obtained primarily from 

the International Monetary Fund’s dissemination standards bulletin 

board, on the Internet at dsbb.imf.org/Applications/web/sddshome 

(visited Aug. 28, 2008). 

62 The Handbook on Hedonic Indexes, and Quality Adjustments in Price 

Indexes: Special Application to Information Technology Products, Science, 

Technology and Industry Working Paper 2004/9 (Paris: Organization for Economic Cooperation and Development, Oct. 8, 2004), on 

the Internet at www.sourceoecd.org/10.1787/643587187107 (visited 

Aug. 28, 2008).

63 The geometric mean is compared with other computational formulas in Ralph Turvey, Consumer Price Indexes: an ILO manual (Geneva: 

International Labor Office, 1989), pp. 88–92 and Appendix 7. Some 

of the advantages and disadvantages of the geometric mean price index were described from a BLS perspective in 1993 by Moulton, “Basic 

components of the CPI.” available on the Internet, at www.bls.gov/cpi/

cpirsdc.htm (visited Aug. 28, 2008).