Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/200293 
Year of Publication: 
2018
Series/Report no.: 
IFS Working Papers No. W18/04
Publisher: 
Institute for Fiscal Studies (IFS), London
Abstract: 
The Hamilton method for estimating CPI bias is simple, intuitive, and has been widely adopted. We show that the method conflates CPI bias with variation in cost-of-living across income levels. Assuming a single price index across the income distribution is inconsistent with the downward sloping Engel curves that are necessary to implement the method. We develop and implement the Translated Engel curve (TEC) method that disentangles genuine CPI bias from differences caused by comparing changes in the cost of living across different income levels - non-homotheticity. The TEC method gives substantially different estimates of CPI bias prior to major reforms to the CPI in 1999 (post-Boskin), but both methods suggest very little CPI bias thereafter.
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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