LC L}, /§s/2; mEr 79282. CONGRESSIONAL RESEARCH SERVICE LIBRARY OF CONGRESS (rt, 1' VVi¥\§:.> ff,‘ "1, 1:’. 35 § ’ 1 Z, : I , S‘ ‘.5 C. 1 "A;‘.CIy E 3‘ ‘. »' .' ".‘ //' 1.7.: ‘ " ”'~'x'.- ‘I’ i d , ‘V ' ‘ I ~_: in K}. "'3k;:fi’ L1 NOV 16 1989 ‘V Li ST. LOAUEE5. MO- NO LONGER PROPERTY 0!‘ OLHN LIBRARY Bri€f \ § INFLATION AS MEASURED BY THE CONSUMER PRICE INDEX i>MINI BRIEF NUMBER MB792$2 AUTHOR: Gregg Esenwein Economics Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SBRVICB MAJOR ISSUES SYSTEM DATE ORIGINATED 1;/12/i9 DATE UPDATEfi 03 29/32 FOR ADDITIONAL INFORMATION CALL 38745700 O33L CRS- 1 MB79282 UPDATE-O3/29/82 ISSUE DEFINITION During the past several years, the American economy has been. plagued by severe and persistent increases in the general price level. These inflationary trends are meflected in several typesn of economic: statistics, compiled and published by the government on a periedic basisi which provide a measurement of price changes in the various segments of the economy (e.g., the Consumer Price Index, Producer Price Index, and: the implicit price deflator of the Gross National Product). This mini-brief addresses itself to those price movements affecting the average individual *households in the American economy as reflected by the Consumer Price Index-;fiThough criticized for notiaccurately stating the amount of inflation sustainefi by the economy, the index nevertheless continues to be one of the most prominent indicators of the continuing rise in the general price level. BACKGROUND The Consumer Price Index for All Urban Consumers (CPI~U) is published monthly by the Bureau of Labor Statistics (BLS), Department of Labor. As its name implies, the CPI—U is an index, with 1967 as its base year (l967=lO0), used to measure price changes in the cost of a "market basket" of goods and services. The "market basket" is designed to reflect the actual purchases of goods and services by the average urban consumer. The composition of the market basket is determined by extensive consumer. expenditure surveys conducted approximately every lo years (the current CPI-U is based on the l972—74 Consumer Expenditure Survey). The current market basket consists of 400 individual items ranging in scope from the cost of purchasing a new home to the cost of a pound of hamburger (SEE TABLE 1A for a list of the current index values for selected components of the CPI-U). The expenditure weights derived from the Consumer Expenditure Surveys are taken in combination with changes in the price of the items in the lmarket basket to produce a weighted index that can then be used to calculate price changes. The general method of determining price changes between two dates is to calculate the simple percentage change in the index over the period in question. The simple percentage change is determined by dividing the index value in the final period by the index value in the original period, subtracting l, and multiplying by 100. when dealing with month-to-month percentage changes, it is accepted practice to use the seasonally adjusted monthly index values to minimize regular seasonal fluctuations. The month-to—month percentage change in the seasonally adjusted all items index is the most widely reported measurement of inflation. However, it is incorrect to simply multiply this month-to-month change by 12 to arrive at an annual rate of inflation because of the occasional erratic behavior of the index in the short—run. The preferred and more meaningful measure of inflationary trends is a compound annual rate of change over the previous three months. i Calculating a compound annual rate of change over three months yields the annual rate of change that would occur if the trend in price changes over these three months were to continue throughout a 12-month period. For example, the all items CPI-U index value in Dec. l98l was 281.5 and 279.3 in Sept. l98l. The ratio of the Dec. index value to the Sept. index value ‘was 1.007 (281.5/273.3). This indicates that prices during this 3-month period CR8“ 2 MB79282 UPDATE-O3/29/82 increased by .7% (ratio of the Dec. to Sept. index value less one and multiplied by 100). Since three months is equal to a quarter of a year, compounding this trend, .7%, by 4 yields the annual rate of change that would occur if this three-month trend were to continue for l2 monthse In this example, the compound annual rate of change in the all items CPI-U sbetween Dec. 1981 and Sept. 1981 is equal to 3.2% (1.007 raised to the fourth power, less one and multiplied by one hundred). S Additionally, a compound annual rate: of change overi the most recent 6-month period or a simple percentage change over l2 months are equally valid measures of inflationaryrtrends. (SEE TABLE 1B for a list of the current percentage changes inrselected components of the CPI—U.) In addition to thegU;S city average, the CPI—U is also, compiled and published for.variousiregions, cities, and standard metropolitan_ statistical areas (SMSAs);< The GPI-U currently coversr approximately 80%‘/Of the, U0So population. ' ~~ i The following tables present a brief synopsis of both the historical and current data on inflation as reflected by the CPI-U. CRS— 3 MB792s2 UPDATE-03/29/82 TABLE lA CONSUMER PRICE INDEX FOR ALL URBAN CONSUMERS (CPI*U) by expenditure category and commodity and service group U.S. city average (Seasonally adjusted, 1967=100) INDEX VALUES 02/82 01/82 02/81 All items* 283.4 282.5 263.2 Food & beverages 275.8 274.1 263.7 Food 283.2 281.5 271.0 Food at home 278.1 275.9 267.3 Housing 307.9 306.7 281.4 Home purchase* 270.4 269.3 263.0 Fuel & other utilities* 337.1 336.2 304.5 Fue1s* 427.6 426.9 387.4 Apparel & upkeep 190.1 189.3 184.0 Transportation 289.9 291.9 272.6 Gasoline 403.6 413.1 415.2 Medical Care 315.0 312.9 281.5 Commodities 260.4 259.9 249.0 Services 325.6 324.4 290.7 Special indexes : A11 items less food 282.9 282.3 260.9 A11 items less energy* 273.4 272.1 252.5 A11 items less food & energyx 269.5 268.5 246.8 Energyx 413.0 416.4 401.1 * Not seasonally adjusted. Source: Department of Labor, Bureau of Labor Statistics. CRS- 4 MB79282 UPDATE-O3/29/82 TABLE lB _ . PERCENTAGE CHANGES IN THE CONSNMER PRICE INDEX FOR ALL URBAN CONSUMERS (CPI-U) by expenditure category and commodity and service group V U.S. city average (Seasonally adjusted, 1967=l00) Compound % Change annual rates % Change to 02/82 % change to to 02/82 from 01/82 02/82 from 02/81 From Three Sixh months months ago ago All items* 0.3 3.9 5.1 7.7 Food & beverages 0.6 5.9 5.0 4.6 Food 0.6 5.7 4.9 4.5 Food at home 0.8 7.2 5.1 4.0 Housing 0M4 4.1 5.8 9.4 Home purchase*’ 0.4 0.3 -1.6 2.8 Fuel & other utilitiesx 0.3 9.2 5.8 10.7 Fuels* 0.2 9.9 3.9 10.4 .Appare1 & Upkeep 0.4 1.7 1.8 3.3 Transportation =0.7. -1.2 5.1 6.3 Gasoline -2.3 -13.2 -0.5 -2.8 vMedica1 Care 0.7 9.0 10.7 11.9 Commodities 0.2 2.5 4.0 A 4.6 tservices 0.4 5.3 8.8 12.0 Special indexes : All items less food 0.2 3.6 6.4 8.4 All items less energy 0.5 4.5 6.0 8.3 All items less food & energy* 0.4 3.5 6.4 9.2 Energy* -0.8 -1.1 -1.5 3.0 * Not seasonally adjusted. Source: Department of Labor, Bureau of Labor Statistics. casm 5 MB79282 7UPDATE~O3/29/82 TABLE 20 CONSUMER PRICE INDEX FOR ALL URBAN CONSUMERS (CPI-U) U080 city average (1967=100) A11 items Percent change Percentage change Period (Annual average) frem preceding year Dec. to Dec. 1960 8807 106% 1.5% 1961 8906 101 07 1962 9006 102 102 1963 9107 102 106 1964 9209 103 1.2 1965 9405 107 1.9 1966 9702 209 304 1967 10000 208 300 1968 10402 402 407 1969 10908 504 601 1970 11603 509 5.5 1971 12103 403 3.4 1972 12503 303 304 1973 13301 602 808 1974 14707 1100 1202 1975 16102 901 7.0 1976 17005 508 408 1977 18105 605 608 1978 19504 707 900 1979 21704 1103 13.3 1980 24608 1305 1204 1981 27204 1004 809