Substitution Bias in Multilateral Methods for CPI Construction Using Scanner Data

67 Pages Posted: 2 Nov 2018 Last revised: 5 Nov 2018

See all articles by W. Erwin Diewert

W. Erwin Diewert

University of British Columbia (UBC) - Department of Economics; National Bureau of Economic Research (NBER)

Kevin J. Fox

UNSW Australia Business School, School of Economics

Date Written: October 1, 2018

Abstract

The use of multilateral indexes is increasingly an accepted approach for incorporating scanner data in a Consumer Price Index. The attractiveness stems from the ability to be able to control for chain drift bias. Consensus on two key issues has yet to be achieved: (i) the best multilateral method to use, and (ii) the best way of extending the resulting series when new observations become available. We present theoretical and simulation evidence on the extent of substitution biases in alternative methods. Our results suggest the use of the CCDI index with a new method, the “mean splice”, for updating.

Keywords: Consumer Price Index, chain drift, multilateral indexes, Rolling Window indexes, linking methods

JEL Classification: C43, E31

Suggested Citation

Diewert, W. Erwin and Fox, Kevin J., Substitution Bias in Multilateral Methods for CPI Construction Using Scanner Data (October 1, 2018). UNSW Business School Research Paper No. 2018-13, Available at SSRN: https://ssrn.com/abstract=3276457 or http://dx.doi.org/10.2139/ssrn.3276457

W. Erwin Diewert

University of British Columbia (UBC) - Department of Economics ( email )

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Kevin J. Fox (Contact Author)

UNSW Australia Business School, School of Economics ( email )

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