Jump to content

Consumer price index

From Wikipedia, the free encyclopedia

This is an old revision of this page, as edited by Andrewpmk (talk | contribs) at 03:11, 24 July 2006 (→Major research in progress: remove spurious '). The present address (URL) is a permanent link to this revision, which may differ significantly from the current revision.

In economics, a Consumer Price Index (CPI, also retail price index) is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas. It is a price index which tracks the prices of a specified set of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index and a sort of cost-of-living index.

The CPI can be used to track changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, life insurance, and homes) are not included.

Core CPI

The core CPI index excludes goods with high price volatility, such as food and energy.

Calculating the CPI

Base year

Measuring inflation can be done in different ways. The first is using the weightings of goods and services of a base year (quoted "in 1992 Dollars"). Thus, if for example, Americans spent 20% on food, 30% on durables (e.g. cars), 30% on real estate and 20% on everything else, these weights would be used in every year. The base year is regularly updated.

Chained

If the currencies are chained, the weights are changed every year. This takes into account that consumption patterns change over time. In the above example, assume that consumers now buy 10% foodstuffs but 30% of everything else (e.g. electronic gadgets), then a cheapening of these gadgets would show up less if the "base year" method is used rather than the "chained" method, since it would be weighted with only 20% instead of 30%. This would show higher price increases, overestimating inflation.

The Laspayres index (after Etienne Laspeyres) uses the quantities from the first period; the Paasche index (Hermann Paasche) those from the second period. See Price index.

Hedonic adjustments

Due to continual research and refinement of index estimation procedures, such as hedonic regression, changes in the quality of priced goods and services are separated from changes in the price of such goods and services.

Substitution

The CPI is revised on a continuing basis to compensate for the introduction of new products and outlets. [1]

Uses of CPI data

  • As an economic indicator. As the most widely used measure of inflation, the CPI is an indicator of the effectiveness of government policy. Especially for inflation targeting monetary policy makers is the usage of the CPI as a measurement for the inflation a key tool in their policies. In addition, business executives, labor leaders and other private citizens use the index as a guide in making economic decisions.
  • As a deflator of other economic series. The CPI and its components are used to adjust other economic series for price change and to translate these series into inflation-free dollars.
  • As a means for indexation (i.e. adjusting income payments). Over 2 million workers are covered by collective bargaining agreements which tie wages to the CPI. In the U.S., the index affects the income of almost 80 million people as a result of statutory action: 47.8 million Social Security beneficiaries, about 4.1 million military and Federal Civil Service retirees and survivors, and about 22.4 million food stamp recipients. Changes in the CPI also affect the cost of lunches for the 26.7 million children who eat lunch at school. Some private firms and individuals use the CPI to keep rents, royalties, alimony payments and child support payments in line with changing prices. Since 1985, the CPI has been used to adjust the Federal income tax structure to prevent inflation-induced increases in taxes.

CPIs around the world

United States

CPI-U 1913-2004; Source: Department Of Labor

In the USA, CPI figures are prepared monthly by the Bureau of Labor Statistics of the United States Department of Labor,

The CPI-U includes expenditures by urban wage earners and clerical workers, professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, retirees and others not in the labor force. The CPI-W includes only expenditures by those in hourly wage earning or clerical jobs. Recently, the Chained Consumer Price Index C-CPI-U, a chained index, was introduced. The C-CPI-U tries to militate against the substitution bias that is encountered in CPI-W and CPI-U by employing a Tornqvist formula and utilizing expenditure data in adjacent time periods in order to reflect the effect of any substitution that consumers make across item categories in response to changes in relative prices. The new measure, said to be a "superlative" index, is designed to be a closer approximation to a "cost-of- living" index than the present measures. The use of expenditure data for both a base period and the current period in order to average price change across item categories distinguishes the C-CPI-U from the existing CPI measures, which use only a single expenditure base period to compute the price change over time. In 1999, the BLS introduced a geometric mean estimator for averaging prices within most of the index’s item categories in order to approximate the effect of consumers’ responses to changes in relative prices within these item categories. The geometric mean estimator is used in the C-CPI-U in the same item categories in which it is now used in the CPI-U and CPI-W.

Sources of data

Prices for the goods and services used to calculate the CPI are collected in 87 urban areas throughout the country and from about 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords or tenants.

The weight for an item is derived from reported expenditures on that item as estimated by the Consumer Expenditure Survey. Prices are taken throughout the month.

The BLS numbers are available through:

  • Monthly news release. Consumer Price Index. Electronic access available.
  • Historical data in Handbook of Labor Statistics. Electronic access available.
  • Diskettes
  • "LABSTAT" database.

Major research in progress

  • Continuing research on technical improvements in the calculation of the CPI
  • Continuing work on the next major weight revision of the CPI

In 1995, the Boskin Commission found it to be a biased measure, and gave a quantitative analysis of the bias. The Boskin critique helped to spur some changes in the US CPI although it was partially disputed by the BLS. Many of the changes were aimed at moving the CPI to a cost of living model which takes consumer substitutions into account and typically reduces the reported level of inflation.

Eurozone

The European Central Bank (ECB) publishes the Monetary Union Index of Consumer Prices (MUICP). It is a weighted average of price indices of member states. The method is a HICP or "Harmonized Index of Consumer Prices", where goods are split by final consumption; it is a seasonally adjusted chained index.

Sweden

The index is calculated and published by Statistics Sweden ([2]).

Australia

The CPI is calculated and posted quarterly by the Australian Bureau of Statistics ([3]).

Israel

The Israeli CPI (Hebrew: מדד המחירים לצרכן Madad HaMechirim Latsarchan) is calculated and published by the Central Bureau of Statistics.

See also

Retrieved from "https://en.wikipedia.org/w/index.php?title=Consumer_price_index&oldid=65482296"