Challenges in Consumer Price Index Construction

The paper discusses many of the problems that compilers of a Consumer Price Index face. The paper also provides a survey of the four main approaches to bilateral index number theory. These approaches are used by National Statistical Offices to construct their CPIs but these approaches cannot deal with the problems caused by the use of scanner data at the first stage of aggregation. The two main problems are the chain drift problem and the lack of matching problem. In order to deal with these problems, it is necessary to use multilateral index numbers and so seven of the main multilateral methods are explained in the remainder of the paper. The paper concludes with a listing of other challenges to the construction of a CPI. There is some new material on the interpretation of the Commensurability Test and on the Econometric Approach to multilateral index number theory.