A true cost-of-living index would measure the change in the cost of obtaining a fixed level of economic well- being or utility—something that is not clearly defined. In June 1995, out of concern that the CPI may have been inaccurately measuring cost-of-living increases, the U.S. Senate Finance Committee created the Advisory Commission to Study the Consumer Price Index. According to the Commission, because the price of a product often decreases after its introduction in the marketplace, delays in including new products in the CPI prevent the CPI from measuring these price decreases. To obtain the opinions of the five former Boskin Commission members on how much of the bias in the CPI that the Commission estimated in its December 1996 report remains after recent methodological changes to the CPI, we sent the Commission members a questionnaire. It asked for estimates of the extent to which the Commission’s estimate of bias could be reduced or increased as a result of each methodological change. Our questionnaire did not ask the former Commission members about methodological changes that took effect for the CPI calculation before December 1996 because (1) the Commission issued its final report in December 1996 and (2) its final report took into account methodological changes that had been made to the CPI since the Commission’s September 1995 Interim Report. Four former members of the Boskin Commission responded to our questionnaire. Methodological Changes to CPI Since Boskin Commission Report

Between December 1996, when the Boskin Commission issued its final report, and June 1999, when we began this review,  BLS had made seven methodological changes that affected the calculation of the CPI. In addition, as of June 1999, BLS had announced three methodological changes that had not yet been implemented. Former Boskin Commission Members’ Responses on Remaining Bias in the CPI

All four former Boskin Commission members said that the methodological changes had reduced some of the bias in the CPI. However, they had different responses on the extent of the remaining bias. Total Remaining Bias

Of the estimates of remaining bias in the CPI, taking into consideration the seven methodological changes that were already effective as of June 1999, Dr. Jorgenson had the highest point estimate—0.9 percentage point—and the widest plausible range—from 0.6 to 1.4 percentage points. New Products/Quality Change Bias

The four former Boskin Commission members gave somewhat different responses regarding the details of changes related to new products/quality change bias.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the Advisory Commission to Study the Consumer Price Index's (CPI) updated estimate of CPI bias, focusing on the: (1) methodological changes the Bureau of Labor Statistics (BLS) made to the CPI since December 1996, when the Advisory Commission (also referred to as the Boskin Commission) issued its final report; and (2) opinions of the five former Boskin Commission members on how much of the bias in the CPI that the Commission estimated in its December 1996 report remains after recent methodological changes to the CPI.

What GAO Found

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.