Tuesday, August 29, 2006

Where do all the prices come from?

The Washington Post has a pretty interesting article on how the Consumer Price Index is measured. It's a human interest story about the experience of a woman who actually goes into the grocery store to collect all the prices. I like this part:

In the case of the bologna, Gaffney is perplexed. She took down the price as $2.49. But her computer tells her that on her last visit the price was $1.99. After some investigating, Gaffney realizes she grabbed the wrong item this time -- the higher-priced all-beef light bologna.

We like to think that measures like the CPI are simply out there and true. The bologna shows us, however, that there is measurement error involved (even if it is likely to be small) and that the measure is stochastic. (Not to talk about the conceptualization problem: What is it that a typical person consumes.)