At 8:30 a.m. Wednesday, the Bureau of Labor Statistics will release the
Consumer Price Index figures for December. (That link will take you to the new data when it is available.)
Markets will react, economists will analyze. What does it mean to you?
The CPI is used extensively to adjust incomes, lease payments,
retirement benefits, Social Security benefits, food stamp and school lunch benefits, alimony and
tax brackets. The CPI, because of the many ways in which it is used,
affects nearly all Americans.
The Bureau of Labor Statistics (BLS) sends out data
collectors every month to record the prices of about 80,000 goods and services. The idea is to replicate a "market
basket" of goods and services purchased by typical American consumers.
Individual prices are weighted in the index according to their
importance in people's buying habits.
Whose Spending Habits Does the CPI Represent?The CPI is urban-based. Why? Because 87 percent of this country lives in
cities. Not included in the CPI, the BLS says, are the spending patterns of people who live in rural non-metropolitan areas, farm families, people in the
military and those in institutions such as prisons and mental
hospitals. (The cities covered by the CPI are listed below.)
The area in which you live also can affect your price experiences. You
shouldn't expect the national or a regional CPI always to mirror your
price experiences. It is possible, for example, that sharp price increases
in one area are offset by lower prices in other areas, resulting in a more
moderate price change published for the nation or a region.
Some who report the numbers this week will no doubt refer to the CPI as
"the cost of living" index. It isn't. The BLS says a real cost-of living-index would
include things the CPI does not, for instance, taxes not associated with buying things (like income tax and Social Security tax), the cost of crime on your
life and so on.
The CPI is not the only gauge of inflation -- not by a long shot. The CPI measures inflation that consumers feel in their
day-to-day living expenses.
Other indexes
(see question 12) measure other types of inflation, such as the Producer Price Index,
which measures inflation at earlier stages of production, and the
Employment Cost Index, which measures inflation in the labor market.
According to the Bureau of Labor Statistics, the CPI affects you in three main ways:
What are the problems with the CPI? For one thing, it doesn't reflect what is happening with everybody. The
BLS explains:
While several factors can result in the national CPI being different
from your price experience, one major factor is how you
actually spend your money. ... For example, an increase of 5 percent in
housing costs is more important than the same increase for telephone
charges, because most consumers spend more for housing than for telephone
service. Similarly, if you spend more than the average person on medical
care and recreation, and prices rise sharply for these goods and services,
the increase in your personal expenditures and personal price index would
be larger than the increase for the average consumer. Because the CPI is a
comprehensive measure, it contains items that are included in some
individuals' buying patterns and excluded from others. For example, if you
are a homeowner, you are more likely to buy major appliances such as
refrigerators and laundry equipment than a renter would be.
I found
this 1996 USA Today piece
stimulating. It points out the devastating and budget-saving effects
that a CPI report can have on the federal budget. Just a tiny
adjustment in the CPI can save or cost billions of dollars.
What's Counted in the CPIHere's what is included in the index, according to the BLS
:
- Food and beverages
- Housing
- Apparel
- Transportation
- Medical care
- Recreation
- Education and communication
- Other goods and services (tobacco and smoking products, haircuts and
other personal services, funeral expenses)
A couple things the CPI does not include: taxes that aren't directly associated with buying consumer goods and services and investment items.
The BLS has a
detailed FAQ page addressing all these and other issues, including:
What Cities are Included in the CPI?The BLS site breaks down three groups of metropolitan areas for which it publishes the CPI:
The CPI is published monthly for:
- Chicago/Gary, Ind./Kenosha, Wis.
- Los Angeles/Riverside/Orange County (Calif.)
- New York/Long Island/Northern New Jersey
The CPI is released every other month for:
- Atlanta
- Boston/Brockton, Mass./Nashua, N.H.
- Cleveland/Akron (Ohio)
- Dallas/Fort Worth (Texas)
- Detroit/Ann Arbor/Flint (Mich.)
- Houston/Galveston/Brazoria (Texas)
- Miami/Fort Lauderdale (Fla.)
- Philadelphia/Wilmington, Del./Atlantic City, N.J.
- San Francisco/Oakland/San Jose (Calif.)
- Seattle/Tacoma/Bremerton (Wash.)
- Washington, D.C./Baltimore
And the CPI is published on a semiannual basis for:
- Anchorage, Alaska
- Cincinnati/Hamilton (Ohio)
- Denver/Boulder/Greeley (Colo.)
- Honolulu
- Kansas City, Mo.
- Milwaukee/Racine (Wis.)
- Minneapolis/St. Paul (Minn.)
- Pittsburgh
- Portland/Salem (Ore.)
- St. Louis, Mo.
- San Diego
- Tampa/St. Petersburg/Clearwater (Fla.)
