CPI Report
Considering all produced economic statistics by the federal government of the United States, the Consumer Price Index (CPI) is the only one, which has a direct influence on the daily lives of Americans. Several programs of the government as the Social Security benefits are adjusted yearly based on CPI changes. Numerous contracts, be it court orders, leases, government obligations, or business agreements, use the CPI to modify the dollar quantities related to these settlements. For others, the CPI appears to be an abstract and quite challenging thing to comprehend. This paper focuses on expounding CPI through its history, framework, group and weights, and the collection of data.
History of CPI
The foundation for the current CPI started in 1884, almost at the beginning of the federal bureau, which collected information on labor, how it is related to capital, labor hours, and the laboring workers’ earnings. It also collects information on the means of promoting the country’s moral, intellectual, social, and material prosperity (BLA, 60). The first main study, directed by the Bureau of Labor, which impacted future work on the cost of living index, was an analysis of retail prices and family expenditure between 1888 and 1890. This study aimed to reflect the living standards sustained by the real family income levels (Joseph Goldberg and William Moye, 34). These studies were relevant because the collected data worked as the basis for what was possibly the first use of indexing methods to collect economic data by a statistical agency of the U.S. federal government. It was stated that the analytical techniques and indexing methods applied within the Bureau of Labor reports constitute the utmost valuable impact on the history of economic conditions in America (Ibid, 35).
The Bureau of Labor Statistics in the United States reports the consumer price index every month, and the data has been calculated since 1913.
Source: U.S. Bureau of Labor Statistics
The framework of the CPI
The CPI imitates patterns of spending for urban wage employees, clerical workers, and consumers. The consumer group is around 93 percent of the overall population in the U.S. Its basis is on the expenses of nearly every metropolitan or urban residents. These residents comprise of experts, unemployed, retired people, and self-employed. Inflation of consumers for urban consumers is measured by the Chained Consumer Price Index for All Urban Consumers (C-CPI-U), and the Consumer Price Index for All Urban Consumers (CPI-U). The basis of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is on the household expenses incorporated in the definition of CPI-U. The CPI-W group is a subset of the CPI-U, and it is approximately 29 percent of the overall U.S. population. It is vital to recognize that the Bureau of Labor Statistics bases the process of pricing and market baskets for the CPI-W and CPI-U on the encounter of the appropriate regular household.
A market basket is a set of items that mimic the general movement of prices in a market. At an economic level, it is a lasting group of services and goods, which are purchased and traded as staples in an efficient economy. Policymakers and analysts use regular price modifications in a market basket as the main inflation gauge. The foundation of CPI is on a market basket of consumer services and goods whereby a fall or rise in the price of products within the market basket changes the overall worth of the basket. The development of the basket is from thorough expenses information offered by individuals and families on what they purchased. Yearly, the BLS collects data on the items’ cost in the basket and matches the basket price to that of the prior year. There exists a time lag between the use of expenses survey within the CPI and the expenses survey itself. For example, the basis of the 2016 and 2017 CPI data was on the collected information from the 2013 and 2014 Consumer Expenses Survey.
Groups and Weights of the CPI
The CPI represents all services and goods bought for consumption by either CPI-W or CPI-U. The classification of every expenditure item by BLS is into recreation food and beverages, medical care, education and communication, apparel, housing, other services and goods, and transportation. Government levy like vehicle tolls, fees for auto-registration, and charges for water and sewerage are also classification of expenditure items (BLS, 11). Additionally, the CPI comprises excise and sales taxes, which are directly related to certain goods and services’ prices. The CPI excludes social security and income taxes not directly related to the buying of products and services by consumers. It also excludes investment items like bonds, life insurance, stocks, and real estate since these items associate with savings and not daily consumption expenditures. The constituents of price indices are weighted with the use of the quantity spent on these items by consumers to ensure that it imitates the relative significance of the several elements within the average market basket.
Headline inflation is the unrefined inflation amount stated by the Consumer Price Index (CPI), which is reported monthly through the Bureau of Labor Statistics (Will Kenton, 1). It is regularly associated with changes in the cost of living that offers relevant data in the market. Conversely, core inflation eliminates the CPI constituents that might display vast quantities of volatility every month that can result in unwanted falsehood to the headline amount. The frequently excluded factors are those associated with food and energy costs. Policymakers and economists care about core inflation (James Bullard, 2). This is because the food and energy constituents exceedingly vary because of short-term supply interferences, and their huge price variations are likely to right themselves in a relatively short period. Therefore, policymakers and economists focus on core inflation as the degree of causal trends of inflation.
Collection of Data
The data collectors from BLS either visit in person or call thousands of service establishments, retail stores, offices of doctors, and rental units all over the United States. The purpose of visits or calls is to attain data on the prices of various items that are used to measure and track changes in price within the CPI. They record prices of approximately 80,000 items monthly, signifying a systematically chosen sample of the prices consumers pay for the purchase of services and goods (BLS, 13). Throughout every visit or call, the data collector gathers price information on a particular product or service that was accurately defined in a prior visit. In case the selected item is unavailable, or if there have been modifications in the quantity or quality of the service or good ever since the former time prices were collected, a different item is carefully chosen, or the quality alteration in the existing element is documented. So if the BLS is recording price information on ground beef, they will pick a particular type of beef.
Due to the widespread CPI use, especially for modifying inflation payments, its accuracy can have a significant impact on the economy. In recent years, the CPI’s accuracy has been questioned because of several biases that result in overstating the real inflation rate. These biases include substitution, quality, and new products. Substitution bias is when the product’s price in the consumer basket rises considerably. Consumers are likely to substitute for alternative products with lower rates. Let’s say a freeze in Florida leads to the orange price to increase steeply; consumers can substitute the oranges with grapefruits from Texas. Because the CPI is a permanent weight price index, it will not correctly forecast the effect of the rise in price to the budget of the consumer. Over time, advances in technology have increased the usefulness and life of products. If the useful life of automobiles rose substantially, it will decrease the cost of a tire based on per mile. The CPI fails to record such improvements in quality. Novel products are not incorporated into the index until they become standard. Therefore, a decrease in price often related to products of innovative technology is not included in the CPI.
The CPI needs revisions as long as there are significant modifications in the purchasing habits of consumers or changes in the population demographics or distribution. By creating yearly Point-of-Purchase Surveys and Consumer Expenditure Surveys, the BLS will be flexible to observe variations in purchasing habits in a manner that is cost-efficient and timely. Additionally, Census, which is performed every ten years in the U.S. by the United States Census Bureau, will offer data that makes the country able to reselect a fresh geographical sample that correctly imitates the current demographic factors and population distribution. BLS is continuously exploring advanced statistical means so that modifications can be made to the CPI (BLS, 15).
References
Bureau of Labor Act. “Statutes at Large.” (1885), pp. 60
Bureau of Labor Statistics. “Consumer Price Index.” U.S. Bureau of Labor Statistics. 2020, pp. 1-16
James Bullard. “President’s Message: Headline vs. Core Inflation: A look at some issues.” Federal Reserve Bank of St. Louis. 2011, pp.1-3
Joseph P. Goldberg and William T. Moye. “The first hundred years of the Bureau of Labor Statistics.” Washington D.C., U.S. Government Printing Office, 1985, pp.34