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October 1998, Vol. 121, No. 10

Incorporating a geometric mean formula into the CPI

Kenneth V. Dalton, John S. Greenlees, and Kenneth J. Stewart

This article describes an important improvement in the calculation of the Consumer Price Index (CPI). The Bureau of Labor Statistics plans to use a new geometric mean formula for calculating most of the basic components of the Consumer Price Index for all Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This change will become effective with data for January 1999.1

The geometric mean formula will be used in index categories that make up approximately 61 percent of total consumer spending represented by the CPI-U. The remaining index categories, which are shown in exhibit 1, will continue to be calculated as they are currently. On the basis of BLS research, it is expected that the use of the new formula will reduce the annual rate of increase in the CPI by approximately 0.2 percentage point per year.

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1 See, for example, "Improving CPI sample rotation procedures," Consumer Price Index Detailed Report (Bureau of Labor Statistics, October 1994), pp. 7–8.

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Consumer Price Index

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