Should the Cost‐of‐living Index Provide the Conceptual Framework for a Consumer Price Index?

Abstract

In some countries, the cost-of-living (COL) index serves as the conceptual framework for the CPI, but it has been rejected in others. This paper reviews issues that have arisen in the statistical agency debate and in the economics literature on the COL index, including rhetorical matters which have influenced the debate. I contend that COL theoiy is useful as a decision-making framework in estimating components of the CPI, and that COL index theory provides appropriate guidance for measuring consumer inflation, contrary to the view that has been adopted for the European HICP and expressed by an advisory committee for the RPI. In several countries (the United States, Netherlands, Sweden), the theory of the cost-of-living (COL) index provides the conceptual framework for the country's consumer price index (CPI)-see United States Department of Labor (1997), Balk (1994), and Dalen (1999). Others reject the cost-of-living index framework-an example is the Australian Bureau of Statistics (1997). Rejection of the COL index is also explicit in an RPI advisory committee recommendation in the United Kingdom. In still other countries, Canada being an example, official documents for the CPI are ambiguous about the role of the COL index (Statistics Canada, 1995). The international guideline for consumer price indexes, the ILO manual (Turvey, 1989), does not even mention the COL index. The question has taken on heightened interest recently. Part of the stimulus comes from the European Union's relatively new Harmonised Indexes of Consumer Prices (HICP). For the HICPs, Eurostat has rejected the COL