Consumer Price Index

Between December 1996, when the Boskin Commission issued its final report estimating that the Consumer Price Index (CPI) overestimates the cost-of-living by 1.1 percentage points annually, and June 1999, when GAO began this review, the Bureau of Labor Statistics (BLS) made seven methodological changes that affected the calculation of the CPI. BLS also announced three methodological changes that it planned to implement. Four former members of the Boskin Commission said that the seven methodological changes have reduced some of the bias in the CPI, although they had different views on the extent of the remaining bias. Their estimates of the remaining bias ranged from 0.73 to 0.9 percentage points annually. The former Boskin Commission members believe that most of the remaining bias is due to "new products/quality change bias." According to the Commission, this type of bias occurs when new products are not included in the CPI or when they are included after a long delay, which results in the CPI not capturing price decreases that often occur after a product's introduction in the marketplace. New products/quality change bias also occurs when the CPI does not adequately measure the portion of a price increase that is due to an improvement in the quality of a product or service instead of to a rise in the cost of living.

GAO noted that: (1) between December 1996, when the Boskin Commission issued its final report estimating that the CPI overstates the cost of living by 1.1 percentage points annually, and June 1999, when GAO began this review, BLS had made seven methodological changes that affected the calculation of the CPI; (2) in addition, as of June 1999, BLS had announced three methodological changes that had not yet been implemented; (3) four former members of the Commission responded to GAO's questions about the extent to which recent methodological changes in the CPI have reduced its overstatement of the changes in the cost of living--that is, bias--as defined in the Commission's December 1996 report; (4) although all four of these former Boskin Commission members said that the seven methodological changes made to the CPI have reduced some of the bias in the CPI, they had different responses regarding the extent of the remaining bias; (5) their point estimates of the remaining bias varied from 0.73 to 0.9 percentage points annually after taking into account those seven changes; (6) the former Boskin Commission members believe that most of the remaining bias is due to what the Commission referred to as "new products/quality change bias;" (7) according to the Commission, this type of bias occurs when new products are not included in the CPI or when they are included after a long delay, which results in the CPI not capturing price decreases that often occur after a product is introduced in the marketplace; and (8) according to the Commission, new products/quality change bias occurs when the CPI does not adequately measure the portion of a price increase that is due to an improvement in the quality of a product or service instead of to an increase in the cost of living.