UNDERSTANDING THE CONSUMER PRICE INDEX


by: Gordon Wolford

Understanding the U.S. Consumer Price Index (CPI), which is released by the U.S. Department of Labor, is helpful in grasping the concepts of inflation and deflation. Increased prices (inflation) of consumer goods and services over time has been a fact of life as far back as measurements have been taken. The inflationary spiral is a continuous rise in prices that is sustained by the tendency of cost and wage increases to react to each other. A current monthly CPI table appears in each issue of Wyoming Labor Force Trends under the Wyoming Economic Indicators table.

Although the CPI may be incorrectly called the “cost of living index,” it actually measures the changes in prices. These prices are based on a fixed market basket of consumer goods and services purchased by the population. The market basket contains food, shelter, clothing, fuel, transportation fares, charges for doctor and dental services, drugs, and the other goods that people buy for day-to-day living. It does not reflect substitution among items in response to relative price change. In addition, it does not include such factors as income taxes and changes in preferences.

Prices are collected in 85 urban areas across the country from approximately 57,000 housing units and 19,000 retail establishments. Two CPI indexes are constructed monthly from this data by the U.S. Department of Labor, Bureau of Labor Statistics (BLS).

The two CPI’s are CPI-U (All Urban Consumers) and CPI-W (Urban Wage Earners and Clerical Workers). CPI-U and CPI-W index numbers differ because of the weights assigned to commodity groups in the consumer market baskets and spending patterns within samples. Weights of product categories in CPI-U and CPI-W for seven major categories are shown in Figure 1. CPI-U represents 80 percent of the total U.S. population and is based on the expenditures reported by the majority of all consumers.

Movement of the indexes, over monthly or yearly time frames, is usually expressed as percent change rather than the numeric change between the index points. (See footnote for Table 2: 1955-1993 CPI for an explanation of a percent change calculation.)

The percentage change expressed by the changes in the CPI are used frequently by employees and employers. Each group tracks the continuing upward spiral of the cost of most consumer goods, a fact which has led to worker demands for escalation provisions in wage contracts. These contract provisions are more commonly called cost of living allowances (COLA’s). COLA’s are designed to keep employee purchasing power from falling due to inflation.

The next question then is: Did worker’s paychecks keep up with inflation? Inflation in 1992 was at a seven year low. While inflation for all items was 3.0 percent in 1992, the average U.S. wage was up 5.4 percent. The increase in the U.S. wage is calculated by the U.S. Department of Labor, Bureau of Labor Statistics, and is for workers covered by unemployment insurance. It would appear that most U.S. workers continued to see pay gains that at least matched inflation in 1992. For example, in 319 of the 320 metropolitan areas in the United States, average increased during 1992.

The largest pay gains were in New York, N.Y. and Jersey City, N.J., up 10.6 and 8.9 percent respectively. Only Mans-field, Ohio indicated a pay decline in 1992 of 0.9 percent. The highest annual wage ($39,006) was in the Bridgeport, Conn. area and the lowest was $15,624 in Jacksonville, N.C.

In 1992 Wyoming workers just matched inflation with a 3.0 percent gain. They did better in Cheyenne, where wages were up 4.5 percent, and worse in Casper, where wages increased only 2.6 percent. In 1993 Wyoming workers may fall behind inflation.

The most recent preliminary covered employment data released by Research & Planning (R&P) indicates that, in April-June 1993, covered wages were $21,476 per annum for all Wyoming workers. This represents a gain of just 2.2 percent from the same quarter in 1992, when covered wages averaged $21,008. Inflation for the United States, during the same time frame registered 3.1 percent. R&P is often asked why the U.S. Department of Labor does not conduct the CPI survey on a state level for data users. The main reason is expense. The total cost of the U.S. survey exceeded 90 million dollars for 1993. Calculating the CPI for states would only add to the cost.



Gordon Wolford is a Senior Statistician in the Local Area Unemployment Statistics (LAUS) Section.



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