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December 1993, Vol. 116, No. 12

Basic components of the CPI: estimation of price changes

Brent R. Moulton

The U.S. Consumer Price Index (CPI) is constructed from basic component indexes. The goods and services that consumers purchase are classified into 207 strata of items, and the urban areas in the United States are divided into 44 areas, each with its own index. Thus, there are 9,108 (207 times 44) basic CPI components into which expenditures are classified. These item-area strata represent the whole population of goods and services priced by the CPI, so the combination of their component price indexes into indexes at higher levels of aggregation represents a choice of aggregation formula, rather than an issue in statistical estimation.

Calculating the price indexes for the basic components, however, involves estimating the indexes on the basis of samples used from all the items that consumers buy. (The term item is construed narrowly in this article, referring to a specific brand, product, outlet, or service.) Also, the available items themselves are constantly changing as outlets enter and exit the market, new products or brands are introduced, and old products are modified, improved, or dropped.

Prior to 1978, the CPI used a nonprobability approach to selecting sample items. Very detailed product specifications were set a priori for each item in the CPI "market basket," and prices of a sample of items meeting those specifications were collected from outlets. The average prices of the items were then used in determining the basic component indexes. A similar method is still employed in calculating price indexes in most other countries.1

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1 Halbert White, Asymptotic Theory for Econometricians (San Diego, Academic Press, 1984), pp. 22-24.

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