New Outlets Bias in the CPI: A Look at Recent Evidence

1. New Outlets Bias in the CPI:A Look at Recent Evidence John Greenlees Robert McClelland We thank Aylin Kumcu for her assistance with this research. All errors are our own. All views expressed in this paper are those of the authors and do not necessarily reflect the views or policies of the U.S. Bureau of Labor Statistics.

2. New Outlets Bias • New Outlets Bias is the failure of the CPI to adequately reflect the gains to consumers from the appearance of new types of product outlets • These welfare gains can arise from: • Greater convenience (e.g., Internet shopping) • Greater product variety (e.g., Tuscan restaurants) • Lower prices (e.g., Wal-Mart, Costco) • This paper focuses only on the lower-price effect

3. CPI Handling of New Outlets • The CPI outlet sample is rotated on a rolling, four-year cycle • The TPOPS is used to generate a frame for PPS sampling of outlets in each product category and area • New outlets are “linked” into the sample in an overlap month • Individual items to price are selected within the outlet using PPS methods • The CPI does not attempt to gather information on differences in prices charged by outlets for the same product

4. CPI Handling of New Outlets No rotation

5. CPI Handling of New Outlets Rotation

6. CPI Handling of New Outlets For outlet type k, define Wk= Swi and Vk= Swk Assume Then

7. Empirical Studies of New Outlets Bias • Hoover and Stotz (1964) • Reinsdorf (1993) • Hausman and Leibtag (2004, 2005)

8. Issues Regarding theLower Price Effect of New Outlets • Do newer outlets offer lower prices? • What is the size of this effect? • Does this represent a bias? • Are the price differentials offset by differentials in quality? • Do existing stores lower their prices to eliminate quality-adjusted price differentials? • What can the CPI do to adjust for new outlets bias? This paper addresses the first two questions.

9. G-M Empirical Approach • Select homogeneous CPI item categories • Subset of Reinsdorf & Hausman/Leibtag categories • Categorize CPI outlets by type of store • Compare store types and price levels in incoming and outgoing CPI samples • Estimate the impact if the BLS reflected the price differentials in the CPI

10. G-M CPI Sample • 14 Food ELIs corresponding to categories used by Reinsdorf and Hausman/Leibtag • 20 outlet-rotation overlap months, April 2002 through October 2006

11. Item Categories

12. Market Shares by Outlet Type

13. Methodology DD discount department stores DDS discount department stores sale price Da area dummies Dt time dummies

14. Regressions Estimates, No Item Specification Variables Standard errors in italics

15. Regressions Estimates, No Item Specification Variables Standard errors in italics

16. Regressions Estimates Standard errors in italics

17. Tomato Checklist

18. Regressions Estimates, Item Specification Variables Standard errors in italics

19. Regressions Estimates, Item Specification Variables Standard errors in italics

20. Regressions Estimates, Item Specification Variables Standard errors in italics

21. Simulated Outlet Rotation Effects

22. Outlet Effects for Roasted Coffee

23. Outlet Effects by Item Category

24. Outlet Effects by Item Category

25. Conclusions • Allowing outlet price differentials in the CPI would lower the estimated inflation by 0.3 to 0.4 percentage point annually in the items we study. However, only eight of the 14 item categories show statistically significant results. • Sale prices at large grocery stores are comparable in many cases to regular prices at discount department stores. • Not conclusive evidence of CPI bias; estimates assume no quality variation across outlets. But outlet types that sell coffee at higher than average prices increase their market share. Discount department stores have average prices higher than warehouse and club stores but they are increasing their market share.