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Consumer price index
In economics, the 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.
Calculating the CPI
Measuring inflation can be done in different ways. The first is using the weightings of goods and services of a base year (quoted "in 1980 Dollars"). Thus, if for example Americans spent 20% on food, 30% on durables (s.a. cars), 30% on real estate and 20% on everything else, these weights would be used in every year. The base year is regularly updated.
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 than the "chained" method, since it would be weighted with only 20% instead of 30%. This would show higher price increases, overestimating inflation.
The chained prices can be computed using two methods. 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
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.
The CPI is revised on a continuing basis to compensate for the introduction of new products and outlets.
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
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.
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.
- "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.
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.
- Gross domestic product
- Harmonized Index of Consumer Prices (HICP)
- Household final consumption expenditure prices (HFCE)
- Implicit price deflator (IPD)
- List of economics topics
- MSN Money - Contrarian Chronicles - 2/9/2004
- Safe Haven | Japanese Phantom Growth - December 15, 2003
- Safe Haven | The Fed Said What? - December 13, 2003
- The Millennium Adventure - They Are Lying to Us Again - 22 Mar 2002
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