![CPI 1914-2022](https://upload.wikimedia.org/wikipedia/commons/4/40/CPI_1914-2022.webp)
A consumer price index (CPI) is a
price index, the price of a weighted average
market basket
A market basket or commodity bundle is a fixed list of items, in given proportions. Its most common use is to track the progress of inflation in an economy or specific market. That is, to measure the changes in the value of money over time. A ...
of
consumer goods
A final good or consumer good is a final product ready for sale that is used by the consumer to satisfy current wants or needs, unlike a intermediate good, which is used to produce other goods. A microwave oven or a bicycle is a final good, but ...
and
services
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a p ...
purchased by households. Changes in measured CPI track changes in prices over time.
Overview
A CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indices and sub-sub-indices can be computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
. A CPI can be used to index (i.e. adjust for the effect of inflation) the real value of
wage
A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', ''prevailing wage'', and ''yearly bonuses,'' and remuner ...
s,
salaries
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis.
F ...
, and
pension
A pension (, from Latin ''pensiō'', "payment") is a fund into which a sum of money is added during an employee's employment years and from which payments are drawn to support the person's retirement from work in the form of periodic payments ...
s; to regulate prices; and to deflate monetary magnitudes to show changes in real values. In most countries the CPI is one of the most closely watched national economic statistics.
![US Consumer Price Index Graph](https://upload.wikimedia.org/wikipedia/commons/3/34/US_Consumer_Price_Index_Graph.svg)
The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, shoes, clothing, each of which is, in turn, a weighted average of sub-sub-indices. At the most detailed level, the elementary aggregate level, (for example, men's shirts sold in department stores in San Francisco), detailed weighting information is unavailable, so indices are computed using an unweighted
arithmetic
Arithmetic () is an elementary part of mathematics that consists of the study of the properties of the traditional operations on numbers— addition, subtraction, multiplication, division, exponentiation, and extraction of roots. In the 19th ...
or
geometric mean
In mathematics, the geometric mean is a mean or average which indicates a central tendency of a set of numbers by using the product of their values (as opposed to the arithmetic mean which uses their sum). The geometric mean is defined as the ...
of the prices of the sampled product offers. (However, the growing use of
barcode scanner
A barcode reader is an optical scanner that can read printed barcodes, decode the data contained in the barcode to a computer. Like a flatbed scanner, it consists of a light source, a lens and a light sensor for translating optical impulses into e ...
data
In the pursuit of knowledge, data (; ) is a collection of discrete values that convey information, describing quantity, quality, fact, statistics, other basic units of meaning, or simply sequences of symbols that may be further interpreted ...
is gradually making weighting information available even at the most detailed level.) These indices compare prices each month with prices in the price-reference month. The weights used to combine them into the higher-level aggregates, and then into the overall index, relate to the estimated expenditures during a preceding whole year of the consumers covered by the index on the products within its scope in the area covered. Thus the index is a fixed-weight index, but rarely a true
Laspeyres index, since the weight-reference period of a year and the price-reference period, usually a more recent single month, do not coincide.
Ideally, the weights would relate to the composition of expenditure during the time between the price-reference month and the current month. There is a large technical economics literature on
index formulas which would approximate this and which can be shown to approximate what economic theorists call a true
cost-of-living index
A cost-of-living index is a theoretical price index that measures relative cost of living over time or regions. It is an index that measures differences in the price of goods and services, and allows for substitutions with other items as pric ...
. Such an index would show how consumer expenditure would have to move to compensate for price changes so as to allow consumers to maintain a constant
standard of living
Standard of living is the level of income, comforts and services available, generally applied to a society or location, rather than to an individual. Standard of living is relevant because it is considered to contribute to an individual's quality ...
. Approximations can only be computed retrospectively, whereas the index has to appear monthly and, preferably, quite soon. Nevertheless, in some countries, notably in the United States and Sweden, the philosophy of the index is that it is inspired by and approximates the notion of a true cost of living (constant utility) index, whereas in most of Europe it is regarded more pragmatically.
The coverage of the index may be limited. Consumers' expenditure abroad is usually excluded; visitors' expenditure within the country may be excluded in principle if not in practice; the rural population may or may not be included; certain groups such as the very rich or the very poor may be excluded. Saving and investment are always excluded, though the prices paid for financial services provided by financial intermediaries may be included along with insurance.
The index reference period, usually called the base year, often differs both from the weight-reference period and the price-reference period. This is just a matter of rescaling the whole
time series
In mathematics, a time series is a series of data points indexed (or listed or graphed) in time order. Most commonly, a time series is a sequence taken at successive equally spaced points in time. Thus it is a sequence of discrete-time data. Exa ...
to make the value for the index reference-period equal to 100. Annually revised weights are a desirable but expensive feature of an index, for the older the weights the greater is the divergence between the current expenditure pattern and that of the weight reference-period.
It is calculated and reported on a per region or country basis on a monthly and annual basis. International organizations like the
Organisation for Economic Co-operation and Development (OECD) report statistical figures like the consumer price index for many of its member countries. In the US the CPI is usually reported by the
Bureau of Labor Statistics
The Bureau of Labor Statistics (BLS) is a unit of the United States Department of Labor. It is the principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics and serves as a principal agency of t ...
.
An English economist by the name of
Joseph Lowe first proposed the theory of price basket index in 1822. His fixed basket approach was relatively simple as Lowe computed the price of a list of goods in period 0 and compared the price of that same basket of goods in period 1. Since his proposed theories however were elementary, later economists built on his ideas to form our modern definition.
Calculating the CPI for a single item
or
:''Where 1 is usually the comparison year and CPI
1 is usually an index of 100.''
Alternatively, the CPI can be performed as
. The "updated cost" (i.e. the price of an item at a given year, e.g.: the price of bread today) is divided by that of the initial year (the price of bread in 1970), then multiplied by one hundred.
Calculating the CPI for multiple items
Many but not all
price indices are weighted averages using weights that sum to 1 or 100.
Example: The prices of 85,000 items from 22,000 stores, and 35,000 rental units are added together and averaged. They are weighted this way: housing 41.4%; food and beverages 17.4%; transport 17.0%; medical care 6.9%; apparel 6.0%; entertainment 4.4%; other 6.9%. Taxes (43%) are not included in CPI computation.
where the
terms do not necessarily sum to 1 or 100.
Weighting
Weights and sub-indices
By convention, weights are fractions or ratios summing to one, as percentages summing to 100 or as per mille numbers summing to 1000.
On the European Union's Harmonized Index of Consumer Prices (HICP), for example, each country computes some 80 prescribed sub-indices, their weighted average constituting the national HICP. The weights for these sub-indices will consist of the sum of the weights of a number of component lower level indices. The classification is according to use, developed in a national accounting context. This is not necessarily the kind of classification that is most appropriate for a consumer price index. Grouping together of substitutes or of products whose prices tend to move in parallel might be more suitable.
For some of these lower-level indices detailed reweighing to make them be available, allowing computations where the individual price observations can all be weighted. This may be the case, for example, where all selling is in the hands of a single national organisation which makes its data available to the index compilers. For most lower level indices, however, the weight will consist of the sum of the weights of a number of elementary aggregate indices, each weight corresponding to its fraction of the total annual expenditure covered by the index. An 'elementary aggregate' is a lowest-level component of expenditure: this has a weight, but the weights of each of its sub-components are usually lacking. Thus, for example: Weighted averages of elementary aggregate indices (e.g. for men's shirts, raincoats, women's dresses, etc.) make up low-level indices (e.g. outer garments).
Weight averages of these, in turn, provide sub-indices at a higher, more aggregated level (e.g. clothing) and weighted averages of the latter provide yet more aggregated
sub-indices (e.g. Clothing and Footwear).
Some of the elementary aggregate indices and some of the sub-indices can be defined simply in terms of the types of goods and/or services they cover. In the case of such products as newspapers in some countries and postal services, which have nationally uniform prices. But where price movements do differ or might differ between regions or between outlet types, separate regional and/or outlet-type elementary aggregates are ideally required for each detailed category of goods and services, each with its own weight. An example might be an elementary aggregate for sliced bread sold in supermarkets in the Northern region.
Most elementary aggregate indices are necessarily 'unweighted' averages for the sample of products within the sampled outlets. However, in cases where it is possible to select the sample of outlets from which prices are collected so as to reflect the shares of sales to consumers of the different outlet types covered, self-weighted elementary aggregate indices may be computed. Similarly, if the market shares of the different types of products represented by product types are known, even only approximately, the number of observed products to be priced for each of them can be made proportional to those shares.
Estimating weights
The outlet and regional dimensions noted above mean that the estimation of weights involves a lot more than just the breakdown of expenditure by types of goods and services, and the number of separately weighted indices composing the overall index depends upon two factors:
# The degree of detail to which available data permit breakdown of total consumption expenditure in the weight reference-period by type of expenditure, region and outlet type.
# Whether there is reason to believe that price movements vary between these most detailed categories.
How the weights are calculated, and in how much detail, depends upon the availability of information and upon the scope of the index. In the UK the retail price index (RPI) does not relate to the whole of consumption, for the reference population is all private households with the exception of pensioner households that derive at least three-quarters of their total income from state pensions and benefits, and "high income households" whose total household income lies within the top four per cent of all households. The result is that it is difficult to use data sources relating to total consumption by all population groups.
For products whose price movements can differ between regions and between different types of outlet:
* The ideal, rarely realizable in practice, would consist of estimates of expenditure for each detailed consumption category, for each type of outlet, for each region.
* At the opposite extreme, with no regional data on expenditure totals but only on population (e.g. 24% in the Northern region) and only national estimates for the shares of different outlet types for broad categories of consumption (e.g. 70% of food sold in supermarkets) the weight for sliced bread sold in supermarkets in the Northern region has to be estimated as the share of sliced bread in total consumption × 0.24 × 0.7.
The situation in most countries comes somewhere between these two extremes. The point is to make the best use of whatever data are available.
The nature of the data used for weighing
No firm rules can be suggested on this issue for the simple reason that the available statistical sources differ between countries. However, all countries conduct periodical household-expenditure surveys and all produce breakdowns of consumption expenditure in their
national accounts
National accounts or national account systems (NAS) are the implementation of complete and consistent accounting techniques for measuring the economic activity of a nation. These include detailed underlying measures that rely on double-entry ...
. The expenditure classifications used there may however be different. In particular:
* Household-expenditure surveys do not cover the expenditures of foreign visitors, though these may be within the scope of a consumer price index.
* National accounts include
imputed rent
Imputed rent is the rental price an individual would pay for an asset they own. The concept applies to any capital good, but it is most commonly used in housing markets to measure the rent homeowners would pay for a housing unit equivalent to the ...
s for owner-occupied dwellings which may not be within the scope of a consumer price index.
Even with the necessary adjustments, the national-account estimates and household-expenditure surveys usually diverge.
The ''statistical sources'' required for regional and outlet-type breakdowns are usually weak. Only a large-sample Household Expenditure survey can provide a regional breakdown. Regional population data are sometimes used for this purpose, but need adjustment to allow for regional differences in living standards and consumption patterns. Statistics of retail sales and market research reports can provide information for estimating outlet-type breakdowns, but the classifications they use rarely correspond to COICOP categories.
The increasingly widespread use of bar codes, scanners in shops has meant that detailed cash register printed receipts are provided by shops for an increasing share of retail purchases. This development makes possible improved Household Expenditure surveys, as Statistics Iceland has demonstrated. Survey respondents keeping a diary of their purchases need to record only the total of purchases when itemized receipts were given to them and keep these receipts in a special pocket in the diary. These receipts provide not only a detailed breakdown of purchases but also the name of the outlet. Thus response burden is markedly reduced, accuracy is increased, product description is more specific and point of purchase data are obtained, facilitating the estimation of outlet-type weights.
There are only two general principles for the estimation of weights: use all the available information and accept that rough estimates are better than no estimates.
Reweighing
Ideally, in computing an index, the weights would represent current annual expenditure patterns. In practice, they necessarily reflect past using the most recent data available or, if they are not of high quality, some average of the data for more than one previous year. Some countries have used a three-year average in recognition of the fact that household survey estimates are of poor quality. In some cases, some of the data sources used may not be available annually, in which case some of the weights for lower-level aggregates within higher-level aggregates are based on older data than the higher level weights.
Infrequent reweighing saves costs for the national statistical office but delays the introduction into the index of new types of expenditure. For example, subscriptions for Internet service entered index compilation with a considerable time lag in some countries, and account could be taken of digital camera prices between re-weightings only by including some digital cameras in the same elementary aggregate as film cameras.
Owner-occupiers and the price index
The way in which owner-occupied dwellings should be dealt with in a consumer price index has been, and remains, a subject of heated controversy in many countries. Various approaches have been considered, each with their advantages and disadvantages.
The economists' approach
Leaving aside the quality of public services, the environment, crime and so forth, and regarding the standard of living as a function of the level and composition of individuals' consumption, this standard depends upon the amount and range of goods and services they consume. These include the service provided by rented accommodation, which can readily be priced, and the similar services yielded by a flat or house owned by the consumer who occupies it. Its cost to a consumer is, according to the economic way of thinking, an "opportunity cost", namely what he or she sacrifices by living in it. This cost, according to many economists, is what should form a component of a consumer price index.
Opportunity cost can be looked at in two ways, since there are two alternatives to continuing to live in an owner-occupied dwelling. One – supposing that it is one year's cost that is to be considered – is to sell it, earn interest on the owner's capital thus released, and buy it back a year later, making an allowance for its physical depreciation. This can be called the "alternative cost" approach. The other, the "rental equivalent" approach, is to let it to someone else for the year, in which case the cost is the rent that could be obtained for it.
There are practical problems in implementing either of these economists' approaches. Thus, with the alternative cost approach, if house prices are rising fast the cost can be negative and then become sharply positive once house prices start to fall, so such an index would be very volatile. On the other hand, with the rental equivalent approach, there may be difficulty in estimating the movement of rental values of types of property that are not actually rented. If one or other of these measures of the consumption of the services of owner-occupied dwellings is included in consumption, then it must be included in income too, for income equals consumption plus saving. This means that if the movement of incomes is to be compared with the movement of the consumer price index, incomes must be expressed as money income plus this imaginary consumption value. That is logical, but it may not be what users of the index want.
Although the argument has been expressed in connection with owner-occupied dwellings, the logic applies equally to all durable
consumer goods
A final good or consumer good is a final product ready for sale that is used by the consumer to satisfy current wants or needs, unlike a intermediate good, which is used to produce other goods. A microwave oven or a bicycle is a final good, but ...
and services. Furniture, carpets and domestic appliances are not used up soon after purchase in the way that food is. Like dwellings, they yield a consumption service that can continue for years. Furthermore, since strict logic is to be adhered to, there are durable services as well that ought to be treated in the same way; the service consumers derive from appendectomies or crowned teeth continue for a long time. Since estimating values for these components of consumption has not been tackled, economic theorists are torn between their desire for intellectual consistency and their recognition that inclusion of the opportunity cost of the use of
durables
In economics, a durable good or a hard good or consumer durable is a good that does not quickly wear out or, more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be consid ...
is impracticable.
Spending
Another approach is to concentrate on spending. Everyone agrees that repairs and maintenance expenditure of owner-occupied dwellings should be covered in a consumer price index, but the spending approach would include mortgage interest too. This turns out to be quite complicated, conceptually as well as in practice.
To explain what is involved, consider a consumer price index computed with reference to 2009 for just one sole consumer who bought her house in 2006, financing half of this sum by raising a mortgage. The problem is to compare how much interest such a consumer would now be paying with the interest that was paid in 2009. Since the aim is to compare like with like, that requires an estimate of how much interest would be paid now in the year 2010 on a similar house bought and 50% mortgage-financed three years ago, in 2007. It does not require an estimate of how much that identical person is paying now on the actual house she bought in 2006, even though that is what personally concerns her now.
A consumer price index compares how much it would cost now to do exactly what consumers did in the reference-period with what it cost then. Application of the principle thus requires that the index for our one house owner should reflect the movement of the prices of houses like hers from 2006 to 2007 and the change in interest rates. If she took out a fixed-interest rate mortgage it is the change in interest rates from 2006 to 2007 that counts; if she took out a variable interest mortgage it is the change from 2009 to 2010 that counts. Thus her current index with 1999 as reference-period will stand at more than 100 if house prices or, in the case of a fixed-interest mortgage, interest rates rose between 2006 and 2007.
The application of this principle in the owner-occupied dwellings component of a consumer price index is known as the "debt profile" method. It means that the current movement of the index will reflect past changes in dwelling prices and interest rates. Some people regard this as odd. Quite a few countries use the debt profile method, but in doing so most of them behave inconsistently. Consistency would require that the index should also cover the interest on consumer credit instead of the whole price paid for the products bought on credit if it covers mortgage interest payments. Products bought on credit would then be treated in the same way as owner-occupied dwellings.
Variants of the debt profile method are employed or have been proposed. One example is to include down payments as well as interest. Another is to correct nominal mortgage rates for changes in dwelling prices or for changes in the rest of the consumer price index to obtain a "real" rate of interest. Also, other methods may be used alongside the debt profile method. Thus several countries include a purely notional cost of depreciation as an additional index component, applying an arbitrarily estimated, or rather guessed, depreciation rate to the value of the stock of owner-occupied dwellings. Finally, one country includes both mortgage interest and purchase prices in its index.
Transaction prices
The third approach simply treats the acquisition of owner-occupied dwellings in the same way as acquisitions of other durable products are treated. This means:
* Taking account of the transaction prices agreed;
* Ignoring whether payments are delayed or are partly financed by borrowing;
* Leaving out second-hand transactions. Second-hand purchases correspond to sales by other consumers. Thus only new dwellings would be included.
Furthermore, expenditure on enlarging or reconstructing an owner-occupied dwelling would be covered, in addition to regular maintenance and repair. Two arguments of an almost theological character are advanced in connection with this transactions approach.
One argument is that purchases of new dwellings are treated as 'investment' in the system of national accounts, so should not enter a consumption price index. It is said that this is more than just a matter of terminological uniformity. For example, it may be thought to help understanding and facilitate economic analysis if what is included under the heading of 'consumption' is the same in the consumer price index and in the national income and expenditure accounts. Since these accounts include the equivalent rental value of owner-occupied dwellings, the equivalent rental approach would have to be applied in the consumer price index too. But the national accounts do not apply it to other durables, so the argument demands consistency in one respect but accepts its rejection in another.
The other argument is that the prices of new dwellings should exclude that part reflecting the value of the land, since this is an irreproducible and permanent asset that cannot be said to be consumed. This would presumably mean deducting site value from the price of a dwelling, site value presumably being defined as the price the site would fetch at auction if the dwelling were not on it. How this is to be understood in the case of multiple dwellings remains unclear.
Confusion
The merits of the different approaches are multidimensional, including feasibility, views on the way the index should and would move in particular circumstances, and theoretical properties of the index.
Statisticians in a country lacking a good dwelling price index (which is required for all except the rental equivalent method) will go along with a proposal to use such an index only if they can obtain the necessary additional resources that will enable them to compile one. Even obtaining mortgage interest rate data can be a major task in a country with a multitude of mortgage lenders and many types of mortgage. Dislike of the effect upon the behavior of the consumer price index arising from the adoption of some methods can be a powerful, if sometimes unprincipled, argument.
Dwelling prices are volatile and so, therefore, would be an index incorporating the current value of a dwelling price sub-index which, in some countries, would have a large weight under the third approach. Furthermore, the weight for owner-occupied dwellings could be altered considerably when reweighting was undertaken. (It could even become negative under the alternative cost approach if weights were estimated for a year during which house prices had been rising steeply).
Then, there is the point that a rise in interest rates designed to halt inflation could paradoxically make inflation appear higher if current interest rates showed up in the index. Economists' principles are not acceptable to all; nor is insistence upon consistency between the treatment of owner-occupied dwellings and other durables.
Consumer price indices in the United States
In the United States several different consumer price indices are routinely computed by the
Bureau of Labor Statistics
The Bureau of Labor Statistics (BLS) is a unit of the United States Department of Labor. It is the principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics and serves as a principal agency of t ...
(BLS). These include the CPI-U (for all urban consumers), CPI-W (for Urban Wage Earners and Clerical Workers), CPI-E (for the elderly), and C-CPI-U (chained CPI for all urban consumers). These are all built over two stages. First, the BLS collects data to estimate 8,018 separate item–area indices reflecting the prices of 211 categories of consumption items in 38 geographical areas. In the second stage, weighted averages are computed of these 8,018 item–area indices. The different indices differ only in the weights applied to the different 8,018 item–area indices. The weights for CPI-U and CPI-W are held constant for 24 months, changing in January of even-numbered years. The weights for C-CPI-U are updated each month to reflecting changes in consumption patterns in the last month. Thus, if people on average eat more chicken and less beef or more apples and fewer oranges than the previous month, that change would be reflected in next month's C-CPI-U. However, it would not be reflected in CPI-U and CPI-W until January of the next even-numbered year.
This allows the BLS to compute consumer price indices for each of the designated 38 geographical areas and for aggregates like the Midwest.
In January of each year,
Social Security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
recipients receive a
cost-of-living adjustment (COLA) "to ensure that the purchasing power of Social Security and
Supplemental Security Income
Supplemental Security Income (SSI) is a means-tested program that provides cash payments to disabled children, disabled adults, and individuals aged 65 or older who are citizens or nationals of the United States. SSI was created by the Social Se ...
(SSI) benefits is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)". The use of CPI-W conflicts with this purpose, because the elderly consume substantially more health care goods and services than younger people.
In recent years, inflation in health care has substantially exceeded inflation in the rest of the economy. Since the weight on health care in CPI-W is much less than the consumption patterns of the elderly, this COLA does not adequately compensate them for the real increases in the costs of the items they buy.
The BLS does track a consumer price index for the elderly (CPI-E). It is not used, in part because the social security trust fund is forecasted to run out of money in roughly 40 years, and using the CPI-E instead of CPI-W would shorten that by roughly five years.
The most recent December 2021 CPI reading hit 7%, the highest level in over 40 years. In response
Jerome Powell
Jerome Hayden "Jay" Powell (born February 4, 1953) is an American attorney and investment banker who has served as the 16th chair of the Federal Reserve since 2018.
After earning a degree in politics from Princeton University in 1975 and a Jur ...
, chair of the
Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
has begun
Quantitative tightening
Quantitative tightening (QT) is a contractionary monetary policy tool applied by central banks to decrease the amount of liquidity or money supply in the economy. A central bank implements quantitative tightening by reducing the financial asset ...
with rate hikes expected to begin in March 2022.
History
The CPI for various years are listed below with 1982 as the base year:
A CPI of 150 means that there was 50% increase in prices, or 50% inflation, since 1982.
Chained CPI
Former White House Chief of Staff
Erskine Bowles
Erskine Boyce Bowles (born August 8, 1945) is an American businessman and political figure from North Carolina. He served from 2005 to 2010 as the president of the University of North Carolina system. In 1997–98 he served as White House Chi ...
and former U.S. Senator
Alan K. Simpson suggested a transition to using a "chained CPI" in 2010, when they headed the
White House's deficit-reduction commission.
They stated that it was a more accurate measure of inflation than the current system and switching from the current system could save the government more than $290 billion over the decade following their report.
[ "The chained CPI is usually 0.25 to 0.30 percentage points lower each year, on average, than the standard CPI measurements".][
However, the National Active and Retired Federal Employees Associations said that the chained CPI does not account for seniors citizens' ]health care costs
Health, according to the World Health Organization, is "a state of complete physical, mental and social well-being and not merely the absence of disease and infirmity".World Health Organization. (2006)''Constitution of the World Health Organiza ...
.[ ]Robert Reich
Robert Bernard Reich (; born June 24, 1946) is an American professor, author, lawyer, and political commentator. He worked in the administrations of President of the United States, Presidents Gerald Ford and Jimmy Carter, and served as United S ...
, former United States Secretary of Labor
The United States Secretary of Labor is a member of the Cabinet of the United States, and as the head of the United States Department of Labor, controls the department, and enforces and suggests laws involving unions, the workplace, and all ot ...
under President Clinton, noted that typical seniors spend between 20 and 40 percent of their income on health care, far more than most Americans. "Besides, Social Security isn't in serious trouble. The Social Security trust fund is flush for at least two decades. If we want to ensure it's there beyond that, there's an easy fix – just lift the ceiling on income subject to Social Security taxes, which is now $113,700."[
Replacing the current cost-of-living adjustment calculation with the chained CPI was considered, but not adopted, as part of a deficit-reduction proposal to avert the sequestration cuts, or ]fiscal cliff
The United States fiscal cliff refers to the combined effect of several previously-enacted laws that came into effect simultaneously in January 2013, increasing taxes and decreasing spending.
The Bush tax cuts of 2001 and 2003, which had been ex ...
, in January 2013,[ but President ]Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
included it in his April 2013 budget proposal.
Personal consumption expenditures price index
Because of some shortcomings of the CPI, notably that it uses static expenditure weighting and it does not account for the substitution effect
In economics and particularly in consumer choice theory, the substitution effect is one component of the effect of a change in the price of a good upon the amount of that good demanded by a consumer, the other being the income effect.
When a g ...
, the PCEPI is an alternative price index used by the Federal Reserve
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, among others, to measure inflation. From January 1959 through July 2018, inflation measured by the PCEPI has averaged 3.3%, while it has averaged 3.8% using CPI.[PCE and CPI indices, Jan 1959 - Jul 2018: ]
See also
* Consumer price index by country
* Asset price inflation
Asset price inflation is the economic phenomenon whereby the price of assets rise and become inflated. A common reason for higher asset prices is low interest rates. When interest rates are low, investors and savers cannot make easy returns using l ...
* Core inflation
Core inflation represents the long run trend in the price level. In measuring long run inflation, transitory price changes should be excluded. One way of accomplishing this is by excluding items frequently subject to volatile prices, like foo ...
* Cost of living index
A cost-of-living index is a theoretical price index that measures relative cost of living over time or regions. It is an index that measures differences in the price of goods and services, and allows for substitutions with other items as pric ...
* FRED (Federal Reserve Economic Data)
Federal Reserve Economic Data (FRED) is a database maintained by the Research division of the Federal Reserve Bank of St. Louis that has more than 816,000 economic time series from various sources. They cover banking, business/fiscal, consumer pri ...
* Harmonized Index of Consumer Prices The Harmonised Index of Consumer Prices (HICP) is an indicator of inflation and price stability for the European Central Bank (ECB). It is a consumer price index which is compiled according to a methodology that has been harmonised across EU countr ...
(HICP)
* Hedonic regression
In economics, hedonic regression, also sometimes called hedonic demand theory, is a revealed preference method for estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of t ...
* Higher Education Price Index
The Higher Education Price Index (HEPI) is a measure of the inflation rate applicable to United States higher education. HEPI measures the average relative level in the prices of a fixed market basket of goods and services typically purchased by ...
* Household final consumption expenditure
Household final consumption expenditure (POES) is a transaction of the national account's use of income account representing consumer spending. It consists of the expenditure incurred bresidenthouseholds on individual consumption goods and service ...
(HFCE)
* GDP deflator
In economics, the GDP deflator (implicit price deflator) is a measure of the money price of all new, domestically produced, final goods and services in an economy in a year relative to the real value of them. It can be used as a measure of the val ...
* Inflation adjustment
In economics, nominal value is measured in terms of money, whereas real value is measured against goods or services. A real value is one which has been adjusted for inflation, enabling comparison of quantities as if the prices of goods had not c ...
* Inflation hedge An inflation hedge is an investment intended to protect the investor against (hedge) a decrease in the purchasing power of money (inflation). There is no investment known to be a successful hedge in all inflationary environments, just as there is no ...
* Inflation rate
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
* Inflationism Inflationism is a heterodox economic, fiscal, or monetary policy, that predicts that a substantial level of inflation is harmless, desirable or even advantageous. Similarly, inflationist economists advocate for an inflationist policy.
Mainstream ec ...
* List of economics topics
The following outline is provided as an overview of and topical guide to economics:
Economics – analyzes the production, distribution, and consumption of goods and services. It aims to explain how economies work and how economic agents in ...
* Market basket
A market basket or commodity bundle is a fixed list of items, in given proportions. Its most common use is to track the progress of inflation in an economy or specific market. That is, to measure the changes in the value of money over time. A ...
(basket of goods)
* MIT Billion Prices project
* Personal consumption expenditures price index
The PCE price index (PePP), also referred to as the PCE deflator, PCE price deflator, or the Implicit Price Deflator for Personal Consumption Expenditures (IPD for PCE) by the Bureau of Economic Analysis (BEA) and as the Chain-type Price Inde ...
(PCEPI)
* Producer price index
A producer price index (PPI) is a price index that measures the average changes in prices received by domestic producers for their output.
Its importance is being undermined by the steady decline in manufactured goods as a share of spending.
...
(PPI)
* Quality bias
* RPIX {{short description, Measure of inflation
RPIX is a measure of inflation in the United Kingdom, equivalent to the all items Retail Price Index (RPI) excluding mortgage interest payments.
History
It was the UK's target rate of inflation from October ...
* World inflation crisis
References
Further reading
* W. E. Diewert, 1993. "The early history of price index research". Chapter 2 of ''Essays in Index Number Theory, Volume I'', W. E. Diewert and A. O. Nakamura, editors. Elsevier Science Publishers, B.V.
External links
Consumer Price Index Data
Issues of the Consumer Price Index report from the BLS for 1953–present
– This large manual produced co-operatively by a number of international organizations is the standard work on the methods of compiling consumer price indices and on the underlying economic and statistical theory.
BLS rebuttal to SGS CPI calculation criticisms
{{Authority control
Price indices