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Paul R. Liegey, Jr.
If a poll were taken of professional economists and statisticians, in all probability they would designate (and by a wide margin) the failure of the price indexes to take full account of quality changes as the most important defect in these indexes. And by almost as large a majority, they would believe that this failure introduces a systematic upward bias in the price indexes-that quality changes have on average been quality improvements.
... Even the concept of quality change is not free of difficulty. Changes in buyers' tastes will lead to the appearance of new goods-an uncontroversial example would be fashionable apparel-which are not improvements judged by either previous or subsequent tastes, and the line separating taste changes from quality improvements will depend on the time span invoked.
-The 1961 Price Statistics Review Committee
Since January 1991, economists working on the Consumer Price index (CPI) have been making direct adjustments for quality differences in the price observations used to calculate apparel commodity indexes.1 These adjustments compensate for the effect of quality changes on apparel prices and are based on dollar-value estimates for product features developed through regression analysis. Previously, quality adjustments were handled implicitly when estimates of price changes were made through a procedure known as imputation.
The Bureau of Labor Statistics computes apparel indexes and other consumer price indexes from the average change in prices for a sample of consumer items in a sample of retail outlets. The price change for each sample item is the ratio of its price in the current period to its price in the previous period. A price change is valid for index use only if the item is the same or at least "comparable" between the two periods. However, measuring apparel price change is particularly difficult; these "fashion-driven" goods are subject to frequent product changes and, in some categories of apparel, items rarely remain in the outlets from one fashion season to the next.
This excerpt is from an article published in the May 1994 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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Footnotes
1 An announcement about this improvement in CPI procedures was reported in CPI Detailed Report
(Bureau of Labor Statistics, September 1990), pp. 6-7.
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