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April 1998, Vol. 121, No. 4

Using survey data to assess bias in the Consumer Price Index

Alan B. Krueger
Bendheim Professor of Economics and Public Affairs, Department of Economics and Woodrow Wilson School, Princeton University, Princeton, New Jersey

Aaron Siskind
Graduate Student, Department of Economics, Princeton University, Princeton, New Jersey

In a previous paper, William Nordhaus provided an estimate of the bias in the Consumer Price Index by comparing the net proportion of families that report an improvement in their financial situation with changes in real median income. In this article, Nordhaus' analysis is extended by using the Panel Study of Income Dynamics (PSID) data set to calculate the actual fraction of families that experienced measured increases and decreases in real income each year from 1968 to 1991. Estimates based on that fraction reveal that using the CPI to deflate family income may in fact provide an unbiased estimate of the fraction of families that report a net improvement in their financial situation.

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Consumer Price Index

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