The Consumer Price Index—Why the Published Averages Don't Always
Match An Individual's Inflation Experience
The Consumer Price Index (CPI) is a measure of the
average change in prices paid by urban consumers for a
market basket of goods and services. Because the CPI is a
statistical average, it may not reflect your experience or that of
specific families or individuals, particularly those whose expenditure
patterns differ substantially from the "average" urban consumer.
Because it is not practical to obtain prices for all consumer
transactions in the United States, the CPI uses a carefully designed set
of samples to estimate prices. These samples are the product of accepted
statistical procedures to make the CPI representative of the prices paid
for all goods and services purchased by urban consumers. Some of these
samples include selected:
- Urban areas from all U.S. urban areas,
- Households within urban areas,
- Retail establishments from which these households (consumers)
purchased goods and services,
- Specified and unique items—goods and services purchased by these
consumers, and
- Housing units from the urban areas for the shelter component of the
CPI.
Therefore, the CPI is an average based on many diverse households and
not a reflection of any particular household.
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. Estimates of expenditures reported in the
Consumer Expenditure Survey for each consumer good or service are used to
produce "expenditure weights" for the CPI. These weights give each good or
service in the CPI an importance relative to all the other goods and
services in the market basket. 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.
The CPI divides the consumer market basket into eight major groups of
goods and services. You can estimate the approximate difference in
your expenditure pattern by estimating your relative expenditures
for major groups of consumer goods and services. You could then compare
them to the CPI groups' relative importance data, which are approximately
the weights used in CPI estimation. For example, the approximate weights
for the eight major groups in the CPI for All Urban Consumers (CPI-U) are
listed below under the CPI-U average column. If your expenditure pattern
is sharply different from the CPI average, the same price changes for the
same expenditure categories would result in different price change
measures for the total market basket. An example of a hypothetical
expenditure pattern for a consumer with high expenditures for medical care
appears in the tabulation that follows.
Relative Importance
CPI-U
average Hypothetical
Expenditure category (Dec.2001) individual
———————————————————————————-
Total (all items) 100.0 100.0
Food and beverages 15.7 20.5
Housing 40.9 25.0
Apparel 4.4 4.5
Transportation 17.1 13.5
Medical care 5.8 25.0
Recreation 6.0 4.0
Education and communication 5.8 3.0
Other goods and services 4.3 4.5
———————————————————————————-
Total, all items 100.0 100.0
Let's assume that there is a price increase of 5 percent for food and
beverages and a 10 percent increase for medical care costs, with no price
changes for the other expenditure categories. This would result in a price
index increase in the published CPI of 1.4 percent. However, it would
result in an increase of 3.5 percent for the hypothetical individual's
price index. The calculations for the national CPI and the hypothetical
individual are shown in the following two tabulations.
National CPI-U average
Relative
Importance,
CPI-U Relative New
average price relative
Expenditure category (Dec.2001) change expenditure
———————————————————————————-
Food and beverages 15.7 x 1.05 = 16.5
Housing 40.9 x 1.00 = 40.9
Apparel 4.4 x 1.00 = 4.4
Transportation 17.1 x 1.00 = 17.1
Medical care 5.8 x 1.10 = 6.4
Recreation 6.0 x 1.00 = 6.0
Education and
communication 5.8 x 1.00 = 5.8
Other goods and
services 4.3 x 1.00 = 4.3
———————————————————————————-
Total, all items 100.0 101.4
101.4/100.0 = 1.4 percent increase
Hypothetical individual
Relative
Importance, Relative New
hypothetical price relative
Expenditure category individual change expenditure
—————————————————————————————
Food and beverages 20.5 x 1.05 = 21.5
Housing 25.0 x 1.00 = 25.0
Apparel 4.5 x 1.00 = 4.5
Transportation 13.5 x 1.00 = 13.5
Medical care 25.0 x 1.10 = 27.5
Recreation 4.0 x 1.00 = 4.0
Education and
communication 3.0 x 1.00 = 3.0
Other goods and
services 4.5 x 1.00 = 4.5
—————————————————————————————
Total, all items 100.0 103.5
103.5/100.0 = 3.5 percent increase
The area in which you live also can affect your price experiences. You
should not expect the national or a regional CPI to always 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.
Another factor in whether you think the CPI reflects your price
experience is that most consumers notice price changes in those goods and
services purchased frequently. These items, such as food, clothing, and
gasoline, have relatively large price swings because of the seasonal
influences in supply and demand. Less attention is paid to many items
(such as most household appliances) that are purchased infrequently, which
often have relatively stable prices.
The CPI is used extensively to adjust incomes, lease payments,
retirement 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. Because the CPI is based on the buying
habits of the "average" consumer, it may not be a perfect reflection of
your individual price experience. However, the CPI is the most
economically feasible method for providing a statistic that is the most
useful in all it's applications.
Information in this report is in the public domain and, with
appropriate credit, may be used without permission. The information is
available to sensory impaired individuals upon request. Voice phone:
(202)691-5200; Federal Relay Service: 1-800-877-8339.
For further information, access the CPI internet site.
Last Modified Date: October 16, 2001