Frequently asked questions (and answers) regarding the consumer price index
Note: Questions and corresponding answer for each, were reproduced from "Understanding the Consumer Price Index: Answers to Some Questions" - a publication of the U.S. Department of Labor, Bureau of Labor Statistics. November 1997 (Revised).
Please select from the questions listed below:
Q3. Is the CPI a cost-of-living index?
Q4. Whose buying habits does the CPI reflect?
Q5. How is the CPI market basket determined?
Q6. What goods and services does the CPI cover?
Q7. How are CPI prices calculated and reviewed?
Q8. How is the CPI calculated?
Q9. How do I read or interpret an index?
Q10. How can I get CPI information?
A1. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a fixed market basket of goods and services. The CPI provides a way to compare what this market basket of goods and services costs this month with what the same market basket cost, say, a month or year ago.
A2. The Consumer Price Index affects nearly all Americans, because of the many ways it is used. Three major uses are:
As an economic indicator. The CPI is the most widely used measure of inflation and is sometimes viewed as an indicator of the effectiveness of government economic policy. It provides information about price changes in the Nation's economy to government, business, labor, and other private citizens, and is used by them as a guide to making economic decisions. In addition, the President, Congress, and the Federal Reserve Board use trends in the CPI to aid in formulating fiscal and monetary policies.
As a deflator of other economic series. The CPI and its components are used to adjust other economic series for price changes and to translate these series into inflation-free dollars. Examples of series adjusted by the CPI include retail sales, hourly and weekly earnings, and components of the national income and product accounts. An interesting example is to use the CPI as a deflator of the value of the consumer's dollar to find its purchasing power. The purchasing power of the consumer's dollar measures the change in the quantity of goods and services a dollar will buy at different dates. In other words, as prices increase, the purchasing power of the consumer's dollar declines.
As a means of adjusting dollar values. As inflation erodes consumer's purchasing power, the CPI is often used to adjust consumers' income payments, for example, Social Security; to adjust income eligibility levels for government assistance; and to automatically provide cost-of-living wage adjustments to millions of American workers. The CPI affects the income of almost 80 million persons, as a result of statutory action: 47.8 million Social Security beneficiaries, about 22.4 million food stamp recipients, and about 4.1 million military and Federal Civil Service retirees and survivors. Changes in the CPI also affect the cost of lunches for 26.7 million children who eat lunch at school, while collective bargaining agreements that tie wages to the CPI cove another 2 million workers.
Another example of how dollar values may be adjusted is the use of the CPI to adjust the Federal income tax structure. These adjustments prevent inflation-induced increases in tax rates, an effect called "bracket creep."
Q3. Is the CPI a cost-of-living index?
A3. No, although it frequently (and mistakenly) is called a cost-of-living index. The Bureau of Labor Statistics (BLS or the Bureau) has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain "utility level" or "standard of living." Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would comprise a complete cost-of-living framework.
Another difference between the CPI and a cost-of-living index is that the CPI does not reflect the changes in buying or consumption patterns that consumers would probably make to adjust to relative price changes. For example, if the price of pork increases compared to those of other meats, shoppers might shift their purchases away from pork to beef, poultry, or fish. The ability to substitute means that the increase in the cost to consumers of maintaining their level of well-being tends to be somewhat less than the increase in the cost of the mix of goods and services they previously purchased. The current CPI does not reflect this substitution among items as a cost-of-living index would. Rather, the current CPI measures the cost of items, in the same fixed proportions (or weights) month after month.
Experimental projects that may move the CPI closer to a cost-of-living measure are underway. Nevertheless, the difficult problems of defining living standards and measuring changes in the cost of their attainment over time make it improbable that a true cost-of-living measure can be produced in the foreseeable future.
Q4. Whose buying habits does the CPI reflect?
A4. The CPI reflects spending patterns for each of two population groups: All Urban Consumers (CPI-U)and Urban Wage Earners and Clerical Workers (CPI-W). The CPI-U represents about 87 percent of the U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired persons, as well as urban wage earners and clerical workers.
Not included in the CPI are spending patterns of persons living in rural non-metropolitan areas, farm families, persons in the Armed Forces, and those in institutions, such as prisons and mental hospitals. The CPI-W is based on the expenditures of households that are included in the CPI-U definition that also meet two requirements: more than one-half of the households income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. The CPI-W's population represents about 32 percent of the total U.S. population and is a subset, or part, of the CPI-U's population.
Q5. How is the CPI market basket determined?
A5. The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought. For the current CPI, this information was collected from the Consumer Expenditure Survey over the three years 1993, 1994, and 1995. In each of these three years, about 7,000 families from around the country provided information on their spending habits in a series of quarterly interviews. To collect information on frequently purchased items, such as food and personal care products, another 5,000 families in each of the three years kept diaries listing everything they bought during a 2-week period.
Altogether, about 36,000 individuals and families provided expenditure information for use in determining the importance, or weight, of the over 200 item categories in the CPI index structure.
Q6. What goods and services does the CPI cover?
A6. The CPI represents all goods and services purchased for consumption by the reference population (CPI-U or CPI-W). BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:
FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full-service meals, and snacks);
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture);
APPAREL (men's shirts and sweaters, women's dresses, jewelry);
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance);
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services);
RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
Also included within these major groups are various government-charged user fees, such as water and sewage charges, auto registration fees, and vehicle tolls. The CPI also includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However; the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services.
The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. (These items relate to savings and not to day-to-day consumption expenses.)
For each of the more than 200 item categories, BLS has chosen samples of several hundred specific items within selected business establishments, using scientific statistical procedures, to represent the thousands of varieties available in the marketplace. For example, in a given supermarket, the Bureau may choose a plastic bag of golden-delicious apples, U.S. extra fancy grade, weighing 4.4 pounds to represent the "Apples" category.
Q7. How are CPI prices collected and reviewed?
A7. Each month, BLS data collectors called economic assistants (formerly known as field representatives) visit or call thousands of retail stores, service establishments, rental units, and doctors' offices, all over the United States, to obtain price information on the thousands of items used to track and measure price change in the CPI. These economic assistants record the prices of about 80,000 items each month. These 80,000 prices represent a scientifically selected sample of the prices paid by consumers for the goods and services purchased.
During each call or visit, the economic assistant collects price data on a specified good or service that was precisely defined during an earlier visit. If the selected item is available, the economic assistant records its price. If the selected item is no longer available, or if there has been changes in the quality or quantity (for example, eggs sold in packages of 8, when previously they had been sold by the dozen) of the good or service since the last time prices were collected, the economic assistant selects a new item or records the quality change in the current item. The recorded information is sent to the national office of the BLS where commodity specialists, who have detailed knowledge about the particular goods or services priced, review the data. These specialists check the data for accuracy and consistency and make any necessary corrections or adjustments. These can range from an adjustment for a change in the size or quantity of a packaged item to more complex adjustments based upon statistical analysis of the value of an item's features or quality. Thus, the commodity specialists strive to prevent changes in the quality of items from affecting the CPI's measurement of price change.
Q8. How is the CPI calculated?
A8. The CPI is a product of a series of interrelated sample. First, using data from the 1990 Census of Population, BLS selects the urban areas from which prices are to be collected and chooses the housing units within each area that are eligible for use in the shelter component of the CPI. The Census of Population also provides data on the number of consumers represented by each area selected as a CPI price collection area. Next, another sample (of about 16,000 families each year)serves as the basis for a Point-of-Purchase Survey that identifies the places where households purchase various types of goods and services.
Data from the Consumer Expenditures Survey conducted from 1993 through 1995, involving a national sample of almost 36,000 families, provided detailed information on their spending habits. This enabled BLS to construct the CPI market basket of goods and services and to assign each item in the basket a weight, or importance, based on total family expenditures. The final stage in the sampling process is the selection of the specific detailed item to priced in each outlet. This is done in the field, using a method called "disaggregation." For example, BLS economic assistants may be directed to price "fresh whole milk." Through the dissaggregation process, the economic assistant selects the specific kind of fresh whole milk that will be priced in the outlet over time. By this process, each kind of whole milk is assigned a probability of selection, or weight, based on the quantity the store sells. If, for example, vitamin D, homogenized milk in half-gallon containers makes up 70 percent of the sales of whole milk; and the same milk in quart containers accounts for 10 percent of all whole milk sales, then the half-gallon container would be seven times as likely to be chosen as the quart container. After probabilities are assigned, one type, brand, and size container of milk is chosen by an objective selection process based on the theory of random sampling. The particular kind of milk that is selected by disaggregation will continue to be priced each month in that outlet. In summary, the price movement measurement is weighted by the importance of the item in the spending patterns of the appropriate population group. The combination of all these factors gives a weighted measurement of price change for all items in all outlets, in all areas priced for the CPI.
Q9. How do I read or interpret an index?
A9. An index is a tool that simplifies the measurement of movements in a numerical series. Most of the specific CPI indexes have a 1982-84 reference base. That is, BLS sets the average index level (representing the average price level) - for the 36 month period covering the years 1982, 1983, and 1984 - equal to 100. The Bureau measures changes in relation to that figure. An index of 110, for example, means there has been a 10-percent increase in price since the reference period; similarly an index of 90 means a 10-percent decrease. Movements of the index from one date to another can be expressed as changes in index points (simply, the difference between index levels), but is more useful to express the movements as percent changes. This is because index points are affected by the level of the index in relation to its reference period, while percent changes are not.
In the following table, Item A increased by half as many index points as Item B between Year I and Year II. Yet, because of the different starting figures, both items had the same percent change; that is, prices advanced at the same rate. On the other hand, Items B and C show the same change in index points, but the percent change is greater for Item C because of its lower starting value.
Item A Item B Item C Year I 112.5 225.0 110.0 Year II 121.5 243.0 128.0 Change in index points 9.0 18.0 18.0 Percent change 8.0% 8.0% 16.4% BLS usually updates reference periods every 10 years or so, to make it easier for people to relate changes in the CPI to other economic and cultural changes.
Q10. How can I get CPI information?
A10. BLS on the Internet. Through the Internet, BLS provides free, easy, and continuous access to almost all published CPI data and press releases. The most recent month's CPI is made available immediately at the time of release.
Additionally, a database called LABSTAT, containing current and historical data for the CPI is accessible. Data and press releases from other BLS surveys are also available. This material is accessible via the World Wide Web (WWW), Gopher, and File Transfer Protocol (FTP), as described below. For help in using any of these systems, send e-mail to labstat.helpdesk@bls.gov
World Wide Web. BLS maintains a Web site at http://stats.bls.gov The BLS home page provides easy access to LABSTAT, as well as links to program specific home pages. In addition to data, the CPI home page, http://www.bls.gov/cpi/ provides other CPI information.
FTP and Gopher. These tools provide access to CPI LABSTAT data, as well as documentation and press release files organized in hierarchical directories. Connect to stats.bls.gov using FTP or Gopher, log on as ANONYMOUS and use your complete Internet e-mail address and password.