In Japan, the Consumer Price Index (CPI) is widely used as a measure of inflation or
the cost of living. The CPI is constructed by using a fixed-weight Laspeyres formula.
This formula is used mainly because of its ease of calculation and comprehension, thus
limiting the total cost of constructing the statistics. However, such simplicity makes
it difficult for the CPI to reflect dynamic changes in economic activity such as changes
in consumers’ behavior between goods in response to relative price fluctuation, the
introduction of new goods, and the disappearance of old goods. As a result,
measurement errors are introduced into the CPI. In this paper, I summarize the
problems pertaining to measurement errors inherent in the Japanese CPI, and provide
some quantitative assessment. Based on currently available information, I place the
point estimate for overall bias in the CPI at about 0.90 percentage point per year.
Although this is the best estimate taking into account all information currently
available, it is true that the estimate was based on various, rather bold assumptions.
In addition, it should be noted that accuracy of the estimate is not necessarily high due
to the lack of existing studies in this field in Japan.