BLS began publishing the Chained Consumer Price Index for All Urban
Consumers effective with the release of July 2002 CPI data. Designated the
C-CPI-U, the index supplements the existing indexes already produced by the BLS:
the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and
Clerical Workers (CPI-W).
The C-CPI-U employs a formula that reflects the effect of substitution that
consumers make across item categories in response to changes in relative prices.
C-CPI-U data can be found on the BLS web site at http://data.bls.gov/cgi-bin/surveymost?su.
Traditionally, the CPI was considered an upper bound on a cost-of-living
index in that the CPI did not reflect the changes in consumption patterns that
consumers make in response to changes in relative prices.
Since January 1999, a geometric mean formula has been used to calculate most
basic indexes within the CPI; this formula allows for a modest amount of
substitution within item categories as relative price changes.
The geometric mean formula, though, does not account for consumer substitution
taking place between CPI item categories. For example, pork and beef are two
separate CPI item categories. If the price of pork increases while the price of
beef does not, consumers might shift away from pork to beef. The C-CPI-U is
designed to account for this type of consumer substitution between CPI item
categories. In this example, the C-CPI-U would rise, but not by as much as an
index that was based on fixed purchase patterns.
With the geometric mean formula in place to account for consumer substitution
within item categories, and the C-CPI-U designed to account for consumer
substitution between item categories, any remaining substitution bias would be
The C-CPI-U does not represent a fundamental change in the underlying
objective of the CPI. BLS has long used the concept of a cost-of-living (COL)
index as a framework for dealing with practical questions that arise in the
construction of the CPI.
While the C-CPI-U accounts for consumer substitution, the CPI still differs
from a complete, or "unconditional," cost-of-living measure. While the CPI
measures changes over time in the cost of consumer goods and services, an
unconditional cost-of-living index would go further, and take into account
changes in non-market factors, such as the environment, crime, and education.
The CPI is said to be "conditional" on those factors.
Both the CPI-U and C-CPI-U are indexes designed to measure price changes
faced by urban consumers, while the CPI-W is designed to measure price changes
faced by urban wage earners and clerical workers. Population coverage is the
only difference between the CPI-U and CPI-W. The C-CPI-U is further distinguished
from the CPI-U and CPI-W based upon the expenditure weights and formula used to
produce aggregate measures of price change.
As background, all three of the CPI indexes are built in two stages. In the
first stage, prices for each of the 8,018 item-area combinations (211 item
categories X 38 geographic areas) are averaged together to form 8,018 basic
indexes. This stage is often referred to as "lower-level aggregation" as it
involves averaging the prices within item-area groups. For example, price
changes for apples within Chicago are averaged together to produce the
Chicago-apples index. In 1999, the BLS introduced a geometric mean formula for
averaging prices within most of these item-area combinations, in order to
approximate the effect of consumer response 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 used in the CPI-U and CPI-W.
In the second stage, sometimes referred to as "higher-level aggregation",
these 8,018 elementary indexes are averaged together to yield various aggregate
indexes and ultimately the All-Items, U.S. City Average index of price change.
It is at this second stage where the C-CPI-U is different from the CPI-U and
CPI-W. The use of a superlative formula for upper-level aggregation, used in
the final C-CPI-U, is designed to address consumer substitution across item
categories. In contrast, the CPI-U and CPI-W use a formula that assumes
consumers do not substitute across item categories.
In the CPI-U and CPI-W, expenditures from a previous (or lagged) two-year
period are used to calculate aggregate indexes. These weights remain fixed for
24 months before being replaced with updated expenditures. For example, the
CPI-U for the years 2004 and 2005 uses expenditure weights drawn from the
2001-2002 Consumer Expenditure Surveys. The final C-CPI-U, on the other hand,
utilizes contemporaneous monthly expenditure estimates for each of the 8,018
elementary indexes. For example, the final C-CPI-U for May 2003 is based on
monthly expenditures for April and May 2003. As such, expenditure data required
for the calculation of the C-CPI-U are available only with a time lag. Thus,
the C-CPI-U is issued first in preliminary form, and is subject to two
subsequent revisions. For example, "final" values of the C CPI-U have been
issued for data through 2003. "Interim" values are available for the 12 months
of 2004, and "initial" values are available for 2005 data. In February 2006,
with release of the January 2006 index, revised interim indexes for the 12
months of 2005 will be published, and the index values for 2004 will be revised
and become final. In each subsequent year, indexes for the months in the year
two years prior will be issued in final form and those values for one year
prior will be revised and issued as interim.
In its final form, the C-CPI-U is a monthly chained price index with the
expenditure weights varying each month. The CPI-U and CPI-W, on the other hand,
are biennial chained price indexes where their expenditure weights are updated
every two years. Within the two-year span, these indexes are fixed-weight series,
where the changes in these indexes reflect only changes in prices, and not
expenditure shares, which are held constant.
More detailed information on how the C-CPI-U is constructed can be found in "Introducing the Chained Consumer Price Index"
The C-CPI-U, which in final form is said to be a "superlative" index,
is designed to be a closer approximation to a cost-of-living index than other
That said, BLS publishes thousands of indexes each month; these indexes can
vary by which items, geographic areas, and populations are covered. As different
users have different needs, BLS cannot say which index is necessarily better
than another. As such, BLS takes no position on what the Congress or the
Administration should use to make adjustments to Social Security or any other
The C-CPI-U to our knowledge currently is not used in any federal legislation
as an adjustment mechanism.
At lower levels, and for short periods of time, it is possible for the
C-CPI-U to increase faster than the CPI-U. That said, the evidence suggests that
the C-CPI-U over time will trend slightly lower than the CPI-U.
Earlier evidence suggested that the difference between the CPI-U and the
C-CPI-U would be around 0.2 percent a year. For the period December 1999 to
December 2000, however, the difference was 0.8 percentage point. There were
a number of reasons for the larger difference, including the relative age of
the weights in the CPI-U, and the increased variation in price movements across
CPI item categories, causing the divergence between the CPI-U and C-CPI-U to
grow. In each of the last four years (including 2004, for which the C-CPI-U
values are not final), the difference in December-to-December changes was 0.3
or 0.4 percentage point.
The C-CPI-U is issued first in preliminary form, and subject to
two subsequent revisions. These revisions have been relatively small, and
are expected to be small in the future. Revisions to 12-month changes in
the All Items index, for example, generally have been 0.2 index points or
No. The initial release uses an "adjustment factor" to estimate the
initial indexes. This adjustment is designed to prevent the initial indexes
from being systematically higher or lower than the interim and final indexes.