Bias in the Consumer Price Index

Recent research has suggested that the upward bias of the U.S. Consumer Price Index may be significant, and correcting the biases would have important long-run effects on the federal budget deficit. This paper describes the sampling procedures used in constructing the CPI and gives simple examples of formula bias and quality adjustment. The empirical evidence on various biases is then reviewed, with an attempt to indicate which biases are reliably estimated and which estimates of bias are based on extrapolation and guesswork. This paper also discuss possibilities for further research leading to potential improvements in the CPI.