Improving initial estimates of the Chained Consumer Price Index

Effective with the release of the January 2015 Consumer Price Index for All Urban Consumers, the U.S. Bureau of Labor Statistics improved the preliminary Chained Consumer Price Index. This article examines the theoretical framework of the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), discusses why the Geometric Young formula was originally chosen over the constant elasticity of substitution (CES) formula, and explains the rationale behind the move to improve the C-CPI-U formula. Further, it presents analysis of the preliminary C-CPI-U to show why the CES formula is a better estimate of the final C-CPI-U than the Geometric Young formula. In January 2015, the U.S. Bureau of Labor Statistics (BLS) implemented two improvements to the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). First, the revision schedule of the index series was changed from an annual revision to a quarterly revision. As a result of the more frequent revisions, the lag between the initial and final publication of each monthly index was reduced by an average of 11 months.1 Second, and the focus of this article, the index formula used to calculate the initial version of the index was changed from an adjusted Geometric Young formula to a constant elasticity of substitution (CES) formula. The new formula was implemented to more closely approximate the final indexes than the previous Geometric Young formula.