by: Gordon Wolford

An understanding of the United States Consumer Price Index (CPI), which is published by the U.S. Department of Labor, Bureau of Labor Statistics (BLS), is helpful in grasping the concepts of inflation and deflation. The CPI is an important statistical measure of the Nations economic well-being. It indicates the effectiveness of government economic policy and can also indicate how occurrences such as droughts, freezes, hurricanes, or disruptions of crude oil supplies affect the pocketbooks of American households. Finally, the CPI is used to adjust wages or salaries for millions of workers covered by collective bargaining agreements and to keep pensions, rents, royalties, alimony, child support payments and taxes in line with changing prices of goods and services.

The CPI is a measure of the average change in prices over time for a fixed market basket of goods and services. Two different CPI's are published. The CPI that covers the majority of the population (80%) is the CPI for All Urban Consumers (CPI-U). The other CPI is for Urban Wage Earners and Clerical Workers (CPI-W) and is a subset of the CPI-U. The CPI-W is based on the expenditures of a sample of families living in urban areas who meet the additional requirements related to employment. The CPI-W represents about 30 percent of the total U.S. population. The CPI-U and CPI-W total more than 100 percent since there is overlap of the population represented because the CPI-W is a subset of the CPI-U.

The two CPI index numbers differ because urban wage and clerical workers spend differently than all urban workers. The CPI market basket is developed from detailed expenditure information provided by families and individuals on what they actually buy. For the current revision of the CPI, this information was collected for 1982, 1983, and 1984. In each of these years, a sample of around 4,800 families provided information on their spending habits, through quarterly interviews. Another 4,800 families kept diaries listing everything they bought during a two-week period.

The CPI is based on prices of food, housing, apparel and upkeep, transportation, medical care, entertainment and other goods and services that people buy for day-to-day living. The market basket is classified into about 250 categories, arranged into these seven major groups. Examples of categories in each of these groups are as follows:

Investment items, such as stocks, bonds, and real estate, are not included. Table 1 allows you to compare the CPI-U index for the seven major groups of goods and services on an annual average basis from 1981 through 1994. The All Items category includes all of the seven major groups.

It is no secret (as Table 1 indicates) that medical care has the highest inflation rate. On the other side of the coin, apparel and upkeep show only slight annual inflation trends from 1981 to 1993, and deflation in the 1993-1994 time frame. This is primarily due to the fact that a good deal of clothing sold in the U.S. is manufactured in third-world countries with very low labor costs.

Table 2 allows you to compare the CPI-U for All Items for any month from January 1955 through September of 1995. Annual yearly index averages and percent changes are also provided for reader convenience. Also, the monthly CPI-U figures in Table 2 may be averaged quarterly to provide useful data for comparison. For example, the average quarterly CPI-U for first quarter 1994 is (146.2+146.7+147.2)/3=146.7. Similarly, the average quarterly CPI-U for first quarter 1995 is 150.9. This yields a percent change of 2.86 percent for the CPI-U from first quarter 1994 to first quarter 1995, while from "Covered Employment and Wages for First Quarter 1995: By Industry" we can see that the Average Weekly Wage (AWW) changed by only 2.3 percent for the same time period.

Over the last 40 years, inflation was not always the topic of discussion it has become in recent years. During the Kennedy Administration of the early 1960's the CPI-U only moved up around one percent annually. Double-digit inflation reared its ugly head in 1974 during the oil embargo which combined with domestic oil shortages to escalate the prices of crude oil. The National recession of the 1979-1981 period was associated with our most recent double-digit inflation.

In calculating the index, approximately 90,000 prices are collected in 91 urban areas across the country. These prices are averaged together with weights which represent their relative importance in the spending patterns of all urban workers as compared to wage and clerical workers. Indexes for different months are compared in relative terms. Thus the index for CPI-U in August 1995 of 152.9 is 1.026 higher than the index of 149.0 for August 1994 (152.9/149.0=1.026). In other words, prices increased 2.6 percent.

In 1988, the reference base for the CPI was changed from 1967=100 to 1982-84=100. The 1982-84 period was chosen to coincide with the updated expenditure weights which were based on the Consumer Expenditure Surveys for the years 1982, 1983 and 1984.

In addition to the monthly publication of CPI indices of the U.S. national averages, certain regional and metropolitan areas are also published. The closest area to Wyoming where CPI data is published is Denver-Boulder. CPI surveys are not conducted on a state level because of the expense.

Recently there has been some thinking by a panel of five economists picked by the Senate Finance Committee that the CPI may overstate annual inflation increases by as much as one percent. The Bureau of Labor Statistics isn't yet certain if any overstatement is as large as the panel claims. The panel said the CPI doesn't adequately reflect the value of improving the quality of goods, doesn't incorporate new products quickly enough, fails to reflect the consumer tendency to buy cheaper alternate goods and doesn't properly measure the shift toward discount outlets. In any event, further studies and recommendations are being deferred until June of next year, according to an article in the Wall Street Journal, September 18, 1995.

If inflation as measured by the CPI was adjusted downward one percent, it could save the Government 634 billion dollars over the next decade, according to Senator Moynihan, senior Democrat on the Senate Finance Committee. Although most of the savings would come from reduced social security payments, other savings would be realized from smaller interest payments on the federal debt and higher taxes.

The CPI index affects the income of more than 60 million persons as a result of statutory action: 38 million Social Security beneficiaries, 3-4 million military and Federal Civil Service retirees and survivors and about 20 million food stamp recipients. According to the Denver Post (October 14, 1995), the Social Security Administration recently announced that social security checks now averaging $702 a month will rise in January 1996 to $720, a 2.6 percent increase. In addition, the CPI is used both to adjust wages and salaries of millions of workers covered by collective bargaining agreements and to keep rents, royalties, alimony and child support payments in line with changing prices. Finally, since 1985 the CPI has been used to adjust the Federal income tax structure to prevent inflation-induced increases in tax rates. Currently, the tax structure is not included in the one percent adjustment downward.

Gordon Wolford is a Senior Statistician with Research & Planning, specializing in Local Area Unemployment Statistics (LAUS).

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