Ignoring Cell Phones Biases CPI Upward

...the bias in the BLS telecommunications services CPI equals approximately 2.3 percentage points per year.

Cellular telephones have been in commercial operation in the United States for 13 years. Beginning in Chicago in late 1983, and then at the Los Angeles Olympic Games in 1984, cellular telephone usage spread first to the top thirty Metropolitan Statistical Areas (MSAs), then to the other 300 or so MSAs, and finally to rural areas. At year end 1996, there were over 40 million cellular subscribers in the United States.

The average cellular subscriber spends $48.84 per month on service, or about $600 per year. Thus, about $24 billion per year is spent on cellular service; cellular revenue is now about one-third as large as long distance revenue. Yet the cellular telephone will not be included in the calculation of the Consumer Price Index (CPI) until 1998 or 1999. "This neglect of new goods leads to an upward bias in the CPI," NBER Research Associate Jerry Hausman concludes in Cellular Telephone, New Products, and the CPI (NBER Working Paper No. 5982).

The CPI estimates that since 1988, telecommunications prices have increased by 8.5 percent, or 1.02 percent per year. A corrected index that includes cellular service decreased 1.28 percent per year since 1988, Hausman figures. "Thus, the bias in the BLS [Bureau of Labor Statistics] telecommunications services CPI equals approximately 2.3 percentage points per year."

To construct a price index for cellular service, Hausman surveyed cellular companies in the top 30 MSAs -- which comprise about 41 percent of the total U.S. population -- since 1985. Even his conservative estimate puts the gain in "consumer welfare" in 1996 from the introduction of cellular telephone service at about $24 billion per year. The BLS does not account for the gain in welfare from the introduction of new products and services, though.