Post‐Laspeyres: The Case for a New Formula for Compiling Consumer Price Indexes

Abstract

Consumer price indexes (CPIs) are commonly compiled at the higher (weighted) level using Laspeyres‐type arithmetic averages. This paper questions the suitability of such formulas and considers two counterpart alternatives that use geometric averaging, the Geometric Young and the (price‐updated) Geometric Lowe. The paper provides a formal decomposition and understanding of the differences between the two. Empirical results are provided using United States CPI data. The findings lead to an advocacy of quite simple variants of a hybrid formula suggested by Lent and Dorfman that use the same data as Laspeyres‐type indexes but substantially reduce their bias.