Improving the Accuracy of the Consumer Price Index

We are in the “hot stove” months of the baseball year, when teams make trades and other decisions to improve their prospects for next season. Even the best teams, like the World Champion Washington Nationals, can’t rest on their laurels. In much the same way the Nationals continue to tinker with a good thing to make it better, we constantly work to improve our gold standard products, including the Consumer Price Index (CPI). There’s a lot going on with the CPI these days, and we’ll use this blog and other publications to share the latest information. You’ll read about how we reflect changes in consumer spending patterns, (including new goods), how we’re using other rich sources of data on prices and spending, how we’re accounting for changes in the quality of goods and services, and much more. So let’s get started.

The CPI is designed to measure the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The CPI is used to determine annual cost-of-living allowances for Social Security beneficiaries. The CPI also is used to adjust the federal income tax system for inflation and as the yardstick for U.S. Treasury inflation-indexed bonds. These are just a few of the many uses of the CPI.

The CPI dates back to 1912, when the Washington baseball team was called the Senators and Walter Johnson ruled the mound. Throughout the history of the CPI, there has been debate about the concepts the CPI should measure and whether it might overstate or understate changes in consumer living costs. The CPI has undergone methodological changes both in response to these discussions and to reflect the changing economic environment. If we hadn’t made these changes, transportation, medical care, recreation, and other goods and services would still be combined into one “miscellaneous” category. Taking the long view, we can track major shifts in consumer inflation for more than a century.

Editor’s note: Data for this chart are available in our database at data.bls.gov/timeseries/CUUR0000SA0

In the 1960s, a committee commissioned by Congress recommended that BLS move the CPI closer toward a cost-of-living measure. We responded to those recommendations by creating the CPI for all urban consumers (CPI-U). The former index for urban wage earners was relabeled as the CPI-W. Today, the CPI-U represents the spending patterns of about 93 percent of the population, while the CPI-W represents the spending patterns of about 29 percent.

Here are a few more recent milestones in the history of the CPI:

• In 1988, following direction from Congress, BLS began calculating the CPI for Americans age 62 and older—called the CPI-E—as an experimental index.
• In the early 1990s, Congress directed another study of the CPI, popularly referred to as the Boskin Commission. This commission estimated the CPI was overstating the rise in the cost of living and recommended changes in the way the CPI is designed and estimated.
• In response, BLS sponsored a project in 2002 with the National Academy of Sciences, Committee on National Statistics (CNSTAT) to investigate conceptual, measurement, and other statistical issues in the development of cost-of-living indexes. At this point, we have adopted completely, partially, or experimentally almost all of the CNSTAT recommendations. This includes developing and publishing the Chained CPI, which broadly accounts for consumer substitution of goods and services.

But we can’t stop researching and improving. Today, consumers buy goods and services that weren’t even known a decade ago. And we buy things in many different ways, including from the living room sofa. The growth of e-commerce has created enormous opportunities, but also challenges, for measuring inflation. We continue to work on improvements in response to these developments, and we will talk more about them in future blogs and other publications. In addition, we recently sponsored another CNSTAT panel to investigate three key methodological issues for the CPI:

1. How best to incorporate data on transactions?
2. How best to integrate other data sources in the indexes for health insurance, owner-occupied housing, and durable goods?
3. How to lessen certain types of substitution bias, such as when consumers purchase chicken when the price of steak increases? (Our methods already do a good job accounting for shifts between more similar items, such as between steak and ground beef.)

CNSTAT will convene an expert panel and hold a workshop. Both the panel kickoff and the workshop will be open to the public and will be announced in advance on the BLS website. The panel will then spend about a year in internal discussions and preparing a written report for our consideration.

We expect the CNSTAT report in May of 2021—new ideas, to go with the start of a new baseball season. I’ll be back to blog about the results, so be sure to check back here.