Consumer price index (CPI)
The Consumer Price Index (CPI) is a vital economic measure that tracks the price changes of a basket of goods and services commonly purchased by urban consumers, such as food, housing, and transportation. Compiled by various countries, including the United States, the CPI serves as a key indicator for assessing inflation, real wage values, and consumer spending behaviors. In the U.S., the Bureau of Labor Statistics (BLS) is responsible for calculating the CPI, updating it monthly to reflect current prices through rigorous data collection and analysis. The CPI categorizes items into eight major groups, encompassing a range of products and services that affect daily living costs.
While the CPI is instrumental for policymakers and economists in making informed decisions, it is important to note that it does not capture the complete cost of living, as it excludes certain qualitative factors such as environmental conditions and health considerations. The CPI also focuses on urban consumers, representing a significant portion of the population, but may not fully reflect rural economic realities. Overall, the CPI is an essential tool for understanding economic conditions and guiding fiscal policy, yet it has limitations that warrant consideration in broader economic analyses.
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Consumer price index (CPI)
A consumer price index (CPI) is a system that tracks the changes in the price of certain goods and services commonly purchased by urban consumers. These purchases include food, housing, vehicles, clothing, education, and other goods and services. Many countries compile CPIs, which provide data useful for measuring inflation, the real value of wages and pensions, consumer behaviors, and other important economic trends and statistics. In the United States, the CPI is calculated and reported monthly by the Bureau of Labor Statistics (BLS).
Brief History
With the rapid worldwide growth of industrialization in the mid and late 1800s, calls arose for increased monitoring, analysis, and regulation of economic factors. In 1884, the US federal government founded the Bureau of Labor Statistics (BLS) to collect and study facts relating to the economics and statistics of American labor. Over time, this information was used to create the consumer price index (CPI).
Around 1888, a government debate over tariffs and imports led Congress to consider the status of American industry. Congress empowered the BLS to study labor economics in the coal, iron, textile, and glass industries. Over the next two years, BLS researchers gathered data from more than 8,500 families associated with the industries in question. The data included working wages, working hours, and the prices of common food items and other everyday supplies in seventy towns and cities. By comparing the families' income to their expenditures, the BLS began creating a statistical picture of the so-called "cost of living" and other factors.
In the 1890s, economic downturns and shifts in worldwide prices brought more attention to the BLS' studies. Around that time, a growing wave of labor disputes began making headlines. In many regions, labor unions and reformers were demanding higher working wages. Government leaders, unsure how to proceed, asked the BLS to investigate labor demands and strikes. Using surveys and statistics, BLS researchers could determine if a particular industry's wages were fair based on whether the average income could pay for a family to maintain acceptable living conditions.
The BLS began regularly gathering data to use in an index of retail prices in US cities. BLS researchers used surveys and other studies to gather and analyze the economic state of a cross-section of the nation's working families. This research continued and increased, and over time the study and understanding of prices and wages in the United States became comprehensive. The BLS' work became standardized into a regularly updated CPI.
Overview
Economic researchers in different countries may take varied approaches to compiling and using CPIs. In the United States, the BLS constantly updates its CPI records and statistics, which are released every month. To provide up-to-date information, BLS researchers monitor average prices in different regions. They work closely with industry groups, labor unions, and members of the public to get the most accurate and useful data.
While the BLS maintains some regularity in its procedures, it sometimes updates its methods to reflect social and economic changes. For example, changes in industry may mean different levels of wages and income for workers. Changes in the average family structure may require updates from more traditional structures. Perceptions of quality of life and desires for different consumer items add more variability into the CPI.
Regardless of the factors, the task of any CPI is to reflect changes over time in how much urban households pay for certain goods and services. These goods and services are divided into various groups and categories. In the United States, there are eight major groups: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.
These groups are divided into about two hundred smaller categories. Within these categories are the individual objects whose prices are tracked. For example, the transportation category includes new cars and trucks, the cost of gasoline and vehicle insurance, and the price of airfare. Education and communication includes a variety of goods and services ranging from college tuition to computer programs and telephone plans. Researchers even monitor expenditures such as funeral services and cigarettes. Groupings of these items are sometimes called market baskets.
The CPI tracks approximately how many of these goods and services are purchased in a given period by two main demographics of the population. The first is all urban consumers, or all people living in cities who purchase goods and services. This group makes up approximately 87 percent of the national population. These people can represent any age, sex, racial group, religion, or orientation, and they do not need to earn an income.
The other demographic is all urban wage earners and clerical workers. This group includes households of all professionals and self-employed people who live in cities. It also includes unemployed people who have worked before. This demographic includes about 32 percent of the national population. Statistics derived within this group help the government, specifically the Social Security Administration (SSA), study money use among working families, so it can adjust benefits to best meet their needs.
Social Security benefit calculations rely on information from the CPI. The CPI also aids in many other important governmental and economic functions. CPI data helps analysts measure inflation, or the changing value of money, and determine the poverty level of a country, state, or region. Congress, state, and local government agencies and business and labor leaders all use CPI data to adjust income payments, make employment projections, and track consumer trends.
Despite the many uses of CPI, experts warn that, contrary to common belief, the CPI does not provide a complete picture of the cost of living. A truly complete cost-of-living measure would also consider many other hard-to-quantify factors that the CPI does not measure. These factors include health and safety concerns, levels of crime in a region, quality of air and water resources, and other variables that can affect the welfare of consumers.
Bibliography
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"Consumer Price Index Frequently Asked Questions." Bureau of Labor Statistics, 1 Feb. 2017, https://www.bls.gov/cpi/cpifaq.htm. Accessed 9 May 2017.
"Consumer Price Index Summary." Bureau of Labor Statistics, 14 April 2017, https://www.bls.gov/news.release/cpi.nr0.htm. Accessed 9 May 2017.
"CPI Detailed Report: 1953-2017," Fraser / Federal Reserve Bank of St. Louis, 2017, https://fraser.stlouisfed.org/title/58. Accessed 9 May 2017.
International Labour Office, International Monetary Fund, et al. Consumer Price Index Manual: Theory and Practice. International Monetary Fund, 2004.
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Rippy, Darren. "The First Hundred Years of the Consumer Price Index: A Methodological and Political History." Monthly Labor Review, April 2014, https://www.bls.gov/opub/mlr/2014/article/the-first-hundred-years-of-the-consumer-price-index-1.htm. Accessed 9 May 2017.
"What Is the Consumer Price Index and How Is It Used?" Institute for Research on Poverty, University of Wisconsin, 2016, www.irp.wisc.edu/faqs/faq5.htm. Accessed 9 May 2017.