Does Quality Adjustment Matter for Technologically Stable Products: An Application to the CPI for Food

摘要

For most indexes in the Consumer Price Index (CPI), the Bureau of Labor Statistics (BLS) uses a form of the matched-model approach. It has long been recognized that the matched-model method can underestimate quality improvement, and therefore overestimate price inflation, for products exhibiting rapid technological improvement. In contrast, it is frequently taken for granted that the matched model approach accurately reflects price inflation for items that have no major trend in quality. In this paper we investigate that hypothesis using CPI data for retail food items. Our results provide evidence on the accuracy of the CPI, on the validity of models of retail firm pricing behavior, and on recent work on the stickiness of prices. The BLS handling of product replacements differs from a pure matched-model method. When an item disappears and is replaced in the CPI sample by another item, a CPI analyst in Washington decides whether the replacement products characteristics are comparable or non-comparable to those of the old product. If the two products are judged non-comparable, they are treated as wholly different models, and their quality-adjusted price difference is imputed from the price movements of other items in the sample. If the two products are judged comparable, however, their prices are used in the index without adjustment, in the same way as if no model change had taken place. As typically discussed, a matched-model index is one that imputes price change in all cases of product replacement. Our paper examines monthly price changes of continuing goods, comparable substitutes and non-comparable substitutes for a set of food items during a six-year period from 2003 through 2009. For substitutions, we compute both the actual price changes and estimated quality-adjusted changes.