Editing Price Statistics Review Committee (Stigler Commission) (section)

== Key Findings on CPI Methodology and Biases ==

The Stigler Commission critically examined the CPI, which at the time was essentially a fixed-weight Laspeyres index measuring changes in the cost of a predetermined "market basket" of goods and services. The committee found this approach inadequate for capturing true changes in the cost of living, as it did not align with how consumers actually behaved in response to price changes. Key biases identified included:

* Substitution Bias: Consumers naturally substitute toward cheaper alternatives when prices rise, but the fixed-basket method ignored this, leading to an overstatement of inflation. The committee noted this was particularly evident during wartime shortages (e.g., World War II and the Korean War), where "forced uptrading" to higher-priced items distorted measurements.
* Quality Change Bias: Improvements or deteriorations in product quality were often not accounted for, resulting in either over- or underestimation of price changes. For instance, if a product's quality improved while its price stayed the same, the index might fail to reflect the effective price decrease in terms of value received.
* New Products Bias: The delayed inclusion of new goods (e.g., emerging technologies) meant the index missed welfare gains from falling prices and increased consumption of these items over time.
* Durable Goods and Homeownership Bias: The CPI treated homeownership costs via an "asset-price" approach, focusing on purchase prices and mortgage interest, which overstated inflation by conflating investment with consumption. The committee argued this ignored the "flow-of-services" consumers actually derive from durables like housing.

Unlike the later [[Boskin Commission|Boskin Commission (1996)]], which quantified an overall [[CPI]] overstatement of about 1.1 percentage points per year, the Stigler Committee avoided precise numerical estimates due to data limitations. However, it emphasized that these conceptual flaws made the [[CPI]] unsuitable for its growing uses in wage negotiations, contracts, and government indexing.