The Commission's Conclusions

In its study, the Boskin Commission, reported several sources of bias in the Consumer Price Index. The biases in the Consumer Price Index could lead to mismeasurement of inflation. In summary, the commission found that the rate of inflation, in recent years, to be off as indicated in the following table, which is adapted from the report:

TABLE 3

Estimates Of Biases In The CPI-Based
Measure Of The Cost Of Living
(Percentage Points Per Annum)

Sources of Bias
Estimate
Upper Level Substitution*0.15
Lower Level Substitution*0.25
New Products/Quality Change0.60
New Outlets0.10
Total1.10  
Plausible range
(0.80-1.60)  

*Price statistics for the Consumer Price Index are processed in two stages, and "substitution bias" may be found at each of the two stages. This is the reason for the difference between "upper level" (second stage) and "lower level" (first stage) substitution bias.

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