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Estimation of the True Cost of Living Index of food consumption for Chinese urban consumers

Abstract This paper studies the True Cost of Living Index (TCLI) of food consumption for all income groups of urban households in China from 1997 to 2012. Based on the Generalised Fechner-Thurstone direct utility function, this paper estimates the TCLI under variable preference assumptions, and also decomposes the total bias of the traditional Laspeyres Price Index (LPI) estimation of TCLI into substitution bias and preference variation bias. For all income group households, the estimated preference variation bias is found to be quite substantial. According to the finding, when it is necessary to apply the cost of living adjustment clause in any public welfare programmes, the TCLI calculation compatible with preference variation may be more appropriate than the usual Laspeyres Consumer Price Index estimation.