The inadequacy of cost of living indices based on subjective preferences: an ethical and methodological critique

Authors: Murphy, Eithne; Garvey, Eoghan

Source: International Review of Applied Economics, Volume 22, Number 6, November 2008 , pp. 745-754(10)

Publisher: Routledge, part of the Taylor & Francis Group

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Abstract:

In this paper we argue that there is scant justification for replacing the traditional fixed-basket Laspeyres price index with so called 'true cost of living indices'. We begin with a discussion of the possible explanations for some empirical results for inflation found for different social groups in Ireland in the late 1990s. Our arguments concerning appropriate inflation indices are primarily ethical and are not dependent on these results being interpreted in a non-neoclassical vein. They do however gain extra force if one accepts non-neoclassical explanations for the empirical results. We go on to draw conclusions as to how best to measure the welfare effects of changes in the price of goods. This links in to the broader debate regarding objective versus subjective measures of welfare.

Keywords: cost of living indices; welfare

Document Type: Research article

DOI: http://dx.doi.org/10.1080/02692170802407734

Affiliations: 1: National University of Ireland, Galway, Ireland

Publication date: 2008-11-01

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