Abstract Particularly since the 1990s, federal statistical agencies have worked to improve the ability of various price indexes to measure changes in the cost of living. However, in recent years, some have sent mixed signals to researchers about the relative merits of different measures. As a result, academic and policy researchers routinely use theoretically and empirically inferior price indexes in their analyses of real income changes. Moreover, a cumulative body of research has identified and estimated the magnitude of a number of biases that affect all of today’s widely used price indexes. These biases remain due to data inadequacy, methodological uncertainty, bureaucratic inertia, and political considerations. Nevertheless, there is little dispute about the direction of the overall bias in these indexes, and considerable consensus as to the magnitudes of the individual biases. It is very likely that all the most commonly used price indexes overstate the rise in the cost of living by a substantively important amount. This paper summarizes the evidence on these biases and translates it into a new “More Accurate Consumer Price Index” (MACPI). It provides annual index values from 1973 to 2023 and illustrates the importance of bias correction by showing a number of long-term trends in wages, earnings, income, and wealth. While the most widely cited inflation measure, the Consumer Price Index for All Urban Consumers (CPI-U) suggests that the average hourly wage of production and nonsupervisory workers rose by 2 percent from 1973 to 2023, and the superior Personal Consumption Expenditures price index (PCEPI) indicates a rise of 30 percent, using the MACPI, wages rose by 61.5 percent. The median wage of prime-age male workers fell by 15 percent using the CPI-U and rose by 9 percent using the PCEPI, but it rose by 35 percent using the MACPI. Other comparisons are similarly striking. Read the entire working paper here .
Authors
- Pages
- 51
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- United States of America
Table of Contents
- American Enterprise Institute 2
- Abstract 2
- 1. Introduction 3
- 2. Consumer Price Indexes and their Biases 5
- The CPI-U 5
- Treatment of Homeowner Costs. 6
- Elimination of Formula Bias. 7
- Near Elimination of Lower-Level Substitution Bias. 8
- Reduced Quality Change Bias. 10
- Reduced New Goods and New Outlet Bias. 11
- The R-CPI-U-RS 13
- The C-CPI-U 14
- Elimination of Upper-Level Substitution and Small-Sample Bias. 14
- The PCEPI 16
- Summary of Biases 18
- Table 1. Sources of Bias in Consumer Price Indexes and Estimated Annual Magnitudes 19
- 3. Federal Statistical Agencies Use and Endorsement of Consumer Price 20
- Indexes 20
- BLS and BEA Statements Regarding Indexes 20
- Census Bureau Use of Indexes 22
- Other Federal Government Uses of Consumer Price Indexes 24
- Congressional Budget Office. 24
- Social Security Administration. 25
- Federal Reserve Board. 26
- Internal Revenue Service. 26
- 4. Building the More Accurate Consumer Price Index 26
- 2000-2023 27
- 1978-2000 27
- 1973-1978 29
- 5. Application Trends in Hourly Wages Annual Earnings Household 32
- Income and Wealth 1973 to 2023 32
- Average Hourly Earnings Private Production and Nonsupervisory Workers 32
- Male and Female Hourly Wages 33
- Mens and Womens Annual Earnings Full-Time Full-Year Workers 34
- Household Income 35
- Wealth 36
- 6. Conclusion 36
- References 39
- Quarterly Journal of Economics 39
- American Economic Review 39
- Journal of Business Economic Statistics 39
- Journal of Official Statistics 39
- Handbook of Methods 39
- CPI Detailed Report Data 39
- CPI Detailed Report January 1980 39
- Journal of Political Economy 39
- Rebuilding American 40
- Capitalism A Handbook for Conservative Policymakers 40
- Journal of Political Economy 40
- Economic Report of the President 40
- Monthly Labor Review 40
- American Economic Review 40
- Current Population Reports. 40
- Monthly Labor Review. 41
- International Productivity Monitor 41
- Federal Reserve Bank of St. Louis Review 41
- Hard-to-Measure Goods and Services Essays in Honor of Zvi Griliches 41
- Current 41
- Population Reports 41
- American Economic 41
- Review 41
- Journal of Business 42
- Federal Reserve Bank of St. Louis 42
- Review 42
- Federal Reserve Bank of St. Louis Review 42
- Monthly Labor Review 42
- Survey of Current Business 42
- Journal of Economic Literature 42
- Econometrica 42
- Survey of Current Business 43
- Brookings Papers on Economic Activity 43
- Journal of Business Economic Statistics 43
- Monthly Labor Review 43
- Securing Our Economic Future 43
- Current Population Reports 44
- Federal Reserve Bank of St. Louis Review 44
- NBER 44
- Macroeconomics Annual 44
- Modernizing the Consumer Price Index for 44
- Monthly Labor Review 44
- Current Population Reports 44
- Current Population Reports 45
- Figure 1. Cumulative Percent Change in Average Hourly Earnings of Production and Nonsupervisory Workers 1973-2023 46
- Figure 2. Cumulative Percent Change in Median Hourly Wages Men Ages 25-54 1973-2023 46
- Figure 3. Cumulative Percent Change in Median Hourly Wages Women Ages 25-54 1973-2023 47
- Figure 4. Cumulative Percent Change in Median Annual Earnings Male Full-Time Year-Round Workers 1973-2023 47
- Figure 5. Cumulative Percent Change in Median Annual Earnings Female Full-Time Year-Round Workers 1973-2023 48
- Figure 6. Cumulative Percent Change in Average Annual Market Income of Households with Children in the Middle Fifth of Income 1979-2021 48
- Figure 7. Cumulative Percent Change in Median Size-Adjusted Annual Post-Tax -Transfer Income of Households 1979-2021 49
- Figure 8. Cumulative Percent Change in Median Wealth Families with Head Age 35-49 1989-2022 49
- Appendix Table 1. Price Index Values 1973-2023 50
- Appendix Table 1. Price Index Values 1973-2023 continued 51
