April 23, 1999 (The Editor’s Desk is updated each business day.)

Have our price indexes dampened productivity measures?

About 57 percent of the current-dollar output used in measuring business sector productivity is adjusted for the effects of price change using portions of the Consumer Price Index (CPI). Thus, any possible bias in the CPI results in incorrect real output and productivity growth rates.

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A 1996 report by the Advisory Commission to Study the CPI stated that the rate of change in the CPI was biased upward by about 1.1 percentage points per year. That estimate reflected, in part, potential biases due to quality change and new product introductions.

The Bureau of Labor Statistics has responded to these criticisms of the CPI and disagrees with many of the findings of the Commission. However, assuming all the Commission’s estimates, including those for quality change and new product bias, actually were correct for the items used to deflate business sector output, real output and productivity growth in the sector would have been understated by approximately 0.6 percentage points in 1997. Roughly half the understatement would have been attributable to quality adjustment issues; most of the rest has been addressed by the recent adoption of geometric means in the CPI formula.

Labor productivity (output per hour) in the business sector increased by about 1.7 percent in 1997; adding 0.6 percentage points would have raised the estimated growth rate by about a third.

Productivity statistics are a product of the Quarterly Labor Productivity program. The CPI is a product of the Consumer Price Index program. For more information on the impact of price indexes on productivity see, "How price indexes affect BLS productivity measures," Monthly Labor Review, February 1999. For more information on measurement issues in the Consumer Price Index see, "Updated Response To The Recommendations Of The Advisory Commission To Study The Consumer Price Index (June 1998)," and "Measurement Issues in the Consumer Price Index (June 1997)" and "Incorporating a geometric new formula in the CPI," Monthly Labor Review, October 1998.