The Consumer Price Index (CPI) measures the average change in prices over time for a market basket of goods and services. The Bureau of Labor Statistics, U.S. Department of Labor, publishes the CPI monthly. In addition to the national data, monthly indexes are
also published for four regions – Midwest, Northeast, South and West.
Most Americans are affected by the Consumer
Price Index because it is used in various ways:
- To indicate inflation.
- To assist the President, Congress, and the Federal Reserve Board as they track trends
to formulate fiscal and monetary policies.
- To adjust other economic statistics for price change and translate current-dollar amounts
into inflation-free values. Statistics that are adjusted by the CPI include retail sales, hourly
and weekly earnings.
- To escalate income payments. There are many
applications of the CPI for this purpose. Some of the most common are reflected in
private industry collective bargaining agreements, long-term rental contracts,
insurance policies with automatic inflation protection, and alimony
payments. In addition, movements in the CPI affect Social Security beneficiaries, retired
military and Federal Civil Service employees and survivors, and the eligibility of
and benefits for food stamp recipients.
The CPI is based on a sample of prices of all goods and services people buy for day-to-day living. Price change is measured by repricing the market basket of goods and services at regular intervals and comparing aggregate costs with the costs of a market basket in a selected base period.
The Bureau's trained representatives visit thousands of retail
establishments and housing units to obtain prices of most goods and services.
The market basket used in construction of the CPI does not imply that consumers actually purchase the same goods and services year after year. In fact, consumers tend to change their shopping habits for a variety of reasons and the CPI market basket changes as a result. As products disappear or are replaced in the marketplace, new items are substituted into the CPI to replace them. In addition, since January 1999, a geometric mean formula has been used to calculate most basic indexes in the CPI. This formula allows for consumer substitution as relative prices within item categories change.
The CPI is frequently called a “cost-of-living index,” but it differs in important ways from a true cost-of-living measure. A cost-of-living index would measure the change
in the amount of money over time that consumers would have to spend to reach a certain standard of living. Both the CPI and a cost-of-living index would include changes in the prices of goods and services that are directly purchased in the marketplace. A complete cost-of-living index would go beyond this to take into account changes in governmental or environmental factors that affect consumers’
well-being, as well as income and Social Security taxes.
As of August 2002, CPIs are published for three population groups: 1) a CPI for All Urban Consumers (CPI-U), representing the spending habits of 87 percent of the population of the U.S.; 2) a CPI for Urban Wage Earners and Clerical Workers (CPI-W), representing the spending habits of 32 percent of the
population, and 3) a new category called the Chained CPI (C-CPI-U),
which attempts to represent a closer approximation to a true
"cost-of-living index." (See details
below) In addition to wage earners and clerical workers, the CPI-U covers professional, managerial, and technical workers, short-term and self-employed workers, unemployed people, retirees, and others not in the labor force. Not covered by either index are people living in rural areas, members of the armed services, and people in institutions.
The CPI is expressed as an index number with a specified base period. Currently, the base period is 1982-84 (1982-1984 =
100, a 3-year average). For example, an index of 161 for a given month means that consumer prices in that month averaged 61 percent higher than in
1982-84.
Movements of the indexes from one month to another are usually expressed as percent changes rather than changes in index points. Index point changes are affected by the level of the index in relation to its base period, while percent changes are not.
Effective with the release in February 2007 of the January 2007
Consumer Price Index (CPI), the Bureau of Labor Statistics (BLS)
will begin to publish its consumer price indexes rounded to three
decimal places. Percent changes will be calculated from the three
decimal place indexes. Those percent changes will continue to be
published to one decimal place.
The examples below illustrate the computation of index points and percent
changes using the old and new methodologies:
|
Index Point
Change - (Old Methodology) |
|
From
December 2005 to December 2006 |
CPI
for current period
Less CPI for previous period
Equals index point change |
201.8
196.8
5.0
|
|
Percent Change |
Index
Point Difference
Divided by the previous index
Equals
Results multiplied by 100 (0.0238 X 100)
Equals percent change |
5.0
196.8
0.0254
2.5 |
|
|
Example From BLS Using
NEW Methodology:
Suppose an
index increased from 203.189 to 203.547. The percent change
for that index will now be published as 0.2 percent, as
203.547/203.189 = 1.00176 = 0.176 percent, or 0.2 percent
when rounded to one decimal place. In contrast, this index
historically would have been published to one decimal place,
and would therefore have been published as 203.2 and 203.5,
respectively. The published percent change would have been
203.5/203.2 = 1.00148 = 0.148 percent, or 0.1 percent when
rounded to one decimal place. |
Information from the monthly news release can be obtained by calling
the Workforce Data and Business Development Bureau of IWD at (515) 281-8182. For more detailed information regarding the indexes, contact the
Regional Office of the Bureau of Labor Statistics in Chicago,
Illinois,
(312) 353-1880. CPI data for this region are available at http://www.bls.gov/ro5/ro5econ.htm.
|
The
Chained CPI-U Supplemental Index
In August 2002, the Bureau of Labor Statistics added a
third index (entitled "C-CPI-U") to the standard CPI-U and
the CPI-W indexes. This new index does not replace, but rather
supplements, the original two indexes. The C-CPI-U is designed to
more closely resemble a true "cost-of-living index" by
taking into account observed consumer behavior, technological changes,
and product substitutions.
The CPI-U and CPI-W are chained, using updated
expenditure weights every two years. The C-CPI-U is chained
monthly, using expenditure data to average price changes across
item categories between a base period (1999, initially) and the
current period. Data are national, not seasonally adjusted,
and subject to revision.
Because expenditure data are only available with
a two year time lag, publication of the C-CPI-U data falls into
three categories: 1) Initial (with a one-month time lag), 2) Interim
(with a 2--13 month time lag), and 3) Final (with a 14--25
month time lag). Initial figures for January 2000 were the
first published in August 2002.
|
