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Office of Survey Methods Research
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Published Year: 2017
Survey/Program(s): Office of Prices and Living Conditions
Catalog: Economic Working Paper
WP Number: WP-498
Publication Status / Disposition: Office of Prices and Living Conditions (August 2017).
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How Much Does Formula vs. Chaining Matter for a Cost‐of‐Living Index? The CPI‐U vs. the C‐CPI‐U
Abstract
A large economics literature has debated the best formula to estimate a cost-of-living index (COLI) - this study shows that formula may not be relevant for many purposes for an index chained at a monthly frequency if current weight information is properly used. The large majority of the difference between the levels of the CPI-U and the generally lower C-CPI- U (a COLI) is due to the CPI-U weights holding quantities constant over long periods, rather than the difference in formula assumptions. A new method to avoid chain drift with long term price relatives is developed to effectively approximate a COLI.