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Old 04-18-2015, 06:15 PM   #21
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Originally Posted by gauss View Post

I guess the question in my mind is why are the powers that be pushing for C-CPI (other than it reduces costs) if substitution effects are already being implicitly included in CPI?

The arguments against CPI that I recall were that folks would keep buying things as they became relatively more expensive was not realistic. It sounds like consumer substitution is already being captured in CPI via actual purchase decisions although it may be implicit.

IMHO- Push for C-CPI is that it gives an "above board" way to adjust the final inflation number used in calculating benefits. The substitution effects are buried in the methodology so perhaps less easy to precisely control.

In the end I basically agree with Running_Man that measured overall inflation is typically tied to median income. BLS tracks what folks actually spend on stuff, and folks tend to spend more as their income rises.

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Old 04-18-2015, 06:59 PM   #22
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Originally Posted by Amethyst View Post
When does the "substituting" bit come in, exactly? I am old enough to recall people talking about substituting hamburger for steak during the inflationary 1970's. By the 1980's (still inflationary) they would have been "substituting" dog or cat food. Did everyone go back to steak and reset the calculator at some point?

I realize it sounds like I'm being flippant, but I'm genuinely puzzled about this.

From the BLS website:

To begin, it must be stated unequivocally that the BLS does not assume that consumers substitute hamburger for steak. Neither the CPI-U, nor the CPI-W used for wage and benefit indexation, allows for substitution between steak and hamburger, which are in different CPI item categories.12 Instead, the BLS uses a formula that implicitly assumes a degree of substitution among the close substitutes within an item-area component of the index. As an example, consumers are assumed to respond to price variations among the different items found within the category “apples in Chicago.” Other examples are “ground beef in Chicago,” “beefsteaks in Chicago,” and “eggs in Boston.”
Hence may statement that the BLS assumes consumers will shift between Gala and Red Delicious apples as relative prices change, but not between chicken and beef.

Download the pdf here: Addressing misconceptions about the Consumer Price Index : Monthly Labor Review : U.S. Bureau of Labor Statistics

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