An Experimental Component Index for the CPI : From Annual Computer Data to Monthly Data on Other Goods

Until recently the Consumer Price Index consisted solely of "matched model" component indexes. The latter are constructed by BLS personnel who visit stores and compare prices of goods with the same set of characteristics over successive periods. This procedure is subject to a selection bias. Goods that were not on the shelves in the second period were discarded and hence never contributed price comparisons. The discarded goods were disproportionately goods which were being obsoleted and had falling prices. Pakes (2003) provided an analytic framework for analyzing this selection effect and showed both that it could be partially corrected using a particular hedonic technique and that the correction for his personal computer example was substantial. The BLS staff has recently increased the rate at which they incorporate techniques to correct for selection effects in their component indexes. However recent work shows very little difference between hedonic and matched model indices for non computer components of the CPI. This paper explores why