The Upward Bias

To the man in the street as to the professional economist, the best barometer of inflation is the Bureau of Labor Statistics' Consumer Price Index, which charts monthly changes in the prices of some 300 items in a "market basket" bought by the average city dweller. Every time the index rises a half point or more, it triggers automatic wage hikes for 2,600,000 industrial-union members. By moving upward over the past two years (it is now at a record high of 127.5), the index has conditioned most Americans to believe that the U.S. is gripped by creeping inflation. Last week, in hearings before the Joint Economic Committee of Congress, some distinguished economists suggested that the C.P.I, has a "systematic upward bias" that has made inflation more of a bogeyman than the facts warrant.

Artificial Rise. A chief cause of the upward bias, said the University of Chicago's George J. Stigler, presenting a report by economists of the National Bureau of Economic Research, is "the failure of the price indexes to take full account of quality changes, which have on average been quality improvements." By simply reporting that consumers pay more for goods, the C.P.I, fails to take into account that buyers often get better clothes or more complex cars for their money. Many other economists, including Harvard's Seymour Harris, agree that quality improvements may offset many of the higher prices reported in the index. If the C.P.I.'s upward bias had been corrected properly, Yale's Richard Ruggles told the committee, the index would actually have shown a net decline in the cost of living of 1% or 2% a year over the past decade.

Another fault that tends to tilt the index upward is its failure to list new products quickly enough. New products generally come out at a fairly high price (as color television did), later drop in cost when the market expands and competitors enter the field. The index usually does not record new products until their prices level off, and then possibly rise a bit as a result of increasing public demand. If new products were entered earlier, the argument goes, they would better reflect the eventual drop in prices, tend to pull the whole index average downward. Delaying their listing, say the economists, permits the index to rise artificially.

Broadened to Bachelors. The report to the Joint Economic Committee suggested that the C.P.I, be broadened to include buying by single people as well as by families--a move already underway--and by rural non-farm families. It would also like to see the index made more sensitive by assigning new percentage weights to goods and services (see chart) as consumer buying patterns change.

Commissioner of Labor Statistics Ewan Clague, whose department is now working on the C.P.I.'s regular ten-year revision, denies that any "enormous rise" in the index could be caused by a failure to measure quality improvements, but concedes that there may be some upward bias in his much-respected index.

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