Sampling Error In The CPI - Its Estimated Statistics And Bias
Economists and analysts rely on the Consumer Price Index (CPI) to determine the economic state. Still, some of them would point out that the CPI is not wholly reliable or precise. Sampling error in the CPI exists because the methodology involved estimated statistics and data.
Author:James PierceReviewer:Camilo WoodNov 14, 202221 Shares1.1K Views
The Consumer Price Index (CPI) is composed of statistical data, which partly explains sampling error in the CPI.
Being a “statistical estimate,” as the U.S. Bureau of Labor Statistics described the CPI in its “Consumer Price Index - September 2022” report, makes it susceptible to sampling error.
Sampling error in the CPI occurs because not all prices get considered during the analyses; only some retail prices.
Measuring Inflation
Sampling Error
To collect data, researchers carry out survey research. That’s what some people from the U.S. Bureau of Labor Statistics (BLS) do when making its monthly CPI report.
In the case of the said report, the BLS takes a sample from a large population that will be analyzed. The procedure is termed as sampling.
The method used in selecting the sample can lead to sampling errors as well as to non-sampling errors, according to Investopedia.
This trustworthy financial website stated in one article:
“„A sampling error is a statistical error that occurs when an analyst does not select a sample that represents the entire population of data.- Adam Hayes, Ph.D., CFA (for Investopedia)
American software company Qualtrics, however, noted that sampling errors are unavoidable and not actually caused by human error. This reality applies to sampling error in the CPI.
Qualtrics identified the following as examples of non-sampling errors:
- wrong choice of people/respondents
- wrong choice of questions in the questionnaire
- allowing bias to affect the result
- not being able to anticipate that people/respondents may not reply
Sampling error involves the analysis of a representative sample. This “representative sample” is a group of people from a large population that will be studied upon.
Sampling Error In CPI
In the U.S., its Bureau of Labor Statistics (BLS) collects data from a representative sample from two main groups.
Thus, there is the Consumer Price Index for All Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
In the case of the CPI-U, based on its September 2022, the BLS calculates every year the “percent change standard errors” in the following period:
- 1-month period
- 2-month period
- 6-month period
- 12-month period
Each year, approximately one million prices of goods and services - the representative sample of items used for the Consumer Price Index - are compiled by the BLS.
That’s according to an August 2012 issue of Beyond the Numbers, a BLS publication.
However, despite that seemingly staggering quantity of prices, the BLS pointed out that, considering all the existing prices, the estimated one million “is only a tiny fraction” of everything.
“„Like other surveys that make estimates based on samples of data, the CPI is subject to sampling error.- Stephen B. Reed and Darren A. Rippy, Consumer Price Index program
In their article for Beyond the Numbers(Aug. 2012, Vol. 1, No. 12), Reed and Rippy explained that the approach towards understanding sampling error in the CPI should be like this: distinguish the estimated CPI from that of the probable estimate if the BLS would get all the existing prices out there.
When it comes to sampling error, they said that it is “really a measure of uncertainty.”
CPI Bias
Sampling error in the CPI does not constitute the biases that the Consumer Price Index tends to have.
Stephen B. Reed and Darren A. Rippy stated that the accuracy of the CPI gets affected by sampling error. Still, they expressed more concern about the possible biases the CPI may have. For them, the latter is “of greater concern” than the former.
In terms of price change, there is the value given by the estimator (in the U.S., it is the BLS for the CPI) and the correct value of the thing (e.g., goods and services) being estimated.
The difference between those two, according to Reed and Rippy, is what bias is all about.
For Reed and Rippy, regardless of sampling error in the CPI, the bias enters the picture when the CPI either understates or overstates inflation.
People Ask
Why Is Sampling Error Important?
According to the Encyclopedia of Research Design, sampling error is vital because it aids researchers in understanding research results better. It also guides them in terms of the “statistical level of confidence” they must place.
How Accurate Is The CPI?
While the CPI is acknowledged as an inflation indicator, the economists at Investopedia described it as a “lagging indicator.” For them, the CPI “may not be very accurate” at indicating inflation levels.
Why Might CPI Not Be Accurate?
The inaccuracy of the CPI, the BLS said, is an “incorrect perception” because the rate that the price of goods change varies depending on the kinds of goods purchased.
For example, the prices of food and beverages change more quickly than the prices of durable goods (e.g., cars and jewelry).
Final Thoughts
Based on what Stephen B. Reed and Darren A. Rippy wrote in Beyond the Numbers, doubt is present in sampling error in the CPI.
Even certain economists such as those from Investopedia expressed their doubt over the precision of the CPI.
Nevertheless, sampling error in the CPIdoes not totally diminish the reliability of the CPI as an inflation indicator.
James Pierce
Author
Camilo Wood
Reviewer
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