Consumer price index

A consumer price index (CPI) along with a population census, is one of the two most important products of national statistical offices. It is a statistical estimate of the movement of the prices of goods and services bought for consumption purposes by households. Its computation uses price data collected for a sample of goods and services from a sample of sales outlets in a sample of locations for a sample of times and estimates of the shares of the different expenditures in the total covered by the index which are usually based upon expenditure data obtained for sampled periods from a sample of households. Although some of the sampling is done using a sampling frame and probabilistic sampling methods, much is done in a commonsense way (purposive sampling) so that confidence intervals cannot be estimated. Nevertheless, the sampling variance is normally ignored, since a single estimate is required in most of the purposes for which the index is used. The two main uses are: a measure of inflation, and the indexation (or evaluation) of wages, salaries, pensions or regulated or contracted prices.

The index is usually computed monthly, quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, clothing,each of which is in turn a weighted average of sub-sub-indices. At the most detailed level, the elementary aggregate level, such as men's trousers sold in department stores in the North West, elementary aggregate indices are computed using an unweighted arithmetic or geometric mean of the prices of the sampled product offers in the absence of such detailed weighting information about quantities or expenditures. (However,the growing use of scanner data is changing this.) These indices compare prices each month with prices in the price-reference month. The weights used to combine them into the higher level aggregates and then into the overall index relate to the estimated expenditures during a preceding whole year of the consumers covered by the index on the products within its scope in the area covered. Thus the index is a fixed weight index, but rarely a Laspeyres index, since the weight-reference period of a year and the price-reference period, usually a more recent single month, do not coincide.It takes time to assemble and process the information used for weighting which, in addition to household expenditure surveys,may include trade and tax data.

Ideally, the weights would relate to the composition of expenditure during the time between the price-reference month and the current month. There is a large technical economics literature on index formulae which would approximate this and which can be shown to approximate what economic theorists call a true cost of living index. Such an index would show how consumer expenditure would have to move to compensate for price changes so as to allow consumers to maintain a constant standard of living. Approximations can only be computed retrospectively, whereas the index has to appear monthly and, preferably, quite soon. Nevertheless, in some countries, notably in N.America and Sweden,the philosophy of the index is that it is inspired by and approximates the notion of a true cost of living (constant utility) index, whereas in most of Europe it is regarded more pragmatically.

The coverage of the index may be limited. Consumers' expenditure abroad is usually excluded; visitors' expenditure within the country may be excluded in principle if not in practice; the rural population may or may not be included; certain groups such as the very rich or the very poor may be excluded. Black market expenditure and expenditure on drugs and prostitution are often excluded for practical reasons, although the professional ethics of the statistician require objective description free of moral judgements. Saving and investment are always excluded, though the prices paid for financial services provided by financial intermediaries may be included along with insurance.

The index reference-period, usually called the base year, often differs both from the weight-reference-period and the price reference-period. This is just a matter of rescaling the whole time-series to make the value for the index reference-period equal 100. Annualy revised weights are a desirable but expensive feature of an index, for the older the weights the greater is the divergence between the current expenditure pattern and that of the weight reference-period.

In the USA, CPI figures are prepared monthly by the Bureau of Labor Statistics of the United States Department of Labor.

The CPI-U includes expenditures by all urban consumers. The CPI-W includes expenditures by consumer units with clerical workers, sales workers, craft workers, operative, service workers, or laborers. Recently, the Chained Consumer Price Index C-CPI-U, a chained index, was introduced. The C-CPI-U tries to mitigate the substitution bias that is encountered in CPI-W and CPI-U by employing a Tornqvist formula and utilizing expenditure data in adjacent time periods in order to reflect the effect of any substitution that consumers make across item categories in response to changes in relative prices. The new measure, called a "superlative" index, is designed to be a closer approximation to a "cost-of- living" index than the other measures. The use of expenditure data for both a base period and the current period in order to average price change across item categories distinguishes the C-CPI-U from the existing CPI measures, which use only a single expenditure base period to compute the price change over time. In 1999, the BLS introduced a geometric mean estimator for averaging prices within most of the index’s item categories in order to approximate the effect of consumers’ responses 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 now used in the CPI-U and CPI-W.

Prices for the goods and services used to calculate the CPI are collected in 87 urban areas throughout the country and from approximately 23,000 retail and service establishments. Data on rents are collected from about 50,000 landlords and tenants.

The weight for an item is derived from reported expenditures on that item as estimated by the Consumer Expenditure Survey. Prices are taken throughout the month.

The BLS numbers are available through:

• Monthly news release. Consumer Price Index. Electronic access available.
• Historical data in Handbook of Labor Statistics. Electronic access available.
• Diskettes
• "LABSTAT" database.

• Continuing research on technical improvements in the calculation of the CPI.
• Continuing work on the next major weight revision of the CPI.

In 1996, the Boskin Commission found the CPI to be a biased measure, and gave a quantitative analysis of the bias. The Boskin critique helped to spur some changes in the U.S. CPI, although it was partially disputed by the BLS. Many of the changes were aimed at moving the CPI to a cost of living model which takes consumer substitutions into account and typically reduces the reported level of inflation.

Statistics Canada looks at all the payments and taxes paid by consumers in Canada and then eventually publishes the CPI figures and the data used in the calculation.^[1]

The European Central Bank publishes the Monetary Union Index of Consumer Prices (MUICP). It is a weighted average of price indices of member states. The method is a HICP or "Harmonized Index of Consumer Prices", where goods are split by final consumption; it is a seasonally adjusted chained index.

The traditional measure of inflation in the UK for many years was the Retail Price Index, which was first calculated in the early 20th Century to evaluate the extent to which workers were affected by price changes during the first world war. An explicit inflation target was first set in October 1992 by then-Chancellor of the Exchequer Norman Lamont following the departure of the UK from the Exchange Rate Mechanism. Initially, the target was based on the RPIX, which is the RPI calculated excluding mortgage interest payments. This was felt to be a better measure of the effectiveness of macroeconomic policy. It was argued that if interest rates are used to curb inflation, then including mortgage payments in the inflation measure would be misleading. Until 1997, interest rates were set by the Treasury.

On winning power in May 1997, the New Labour government handed control over interest rates to the Bank of England, whose Monetary Policy Committee now sets rates on the basis of an inflation target set by the Chancellor.^[2] If in any month inflation is more than one percentage point off its target, the Governor of the Bank of England is required to write to the Chancellor explaining why.

Since 1996 the United Kingdom has also tracked a Consumer Price Index figure, and in December 2003 its inflation target was changed to one based on the CPI. ^[3] The CPI target is currently 2%. Both the CPI and the RPI are published monthly by the Office for National Statistics.

In Belgium, wages, pensions, house rent, insurance premiums, unemployment benefits, health insurance payments, etc. are by law tied to a consumer price index.

The INPC, which stands for Indice Nacional de Precios al Consumidor (National Consumer Price Index in English), is calculated and published on a monthly basis by Banco de México, the Central Bank. [1]

The index is calculated and published by Statistics Sweden^[4]

Switzerland issues a monthly CPI calculation by the Swiss Federal Statistical Office.^[5]

The CPI is calculated and posted quarterly by the Australian Bureau of Statistics .^[6] Historical figures are available at the Reserve Bank of Australia website.^[7]

China's CPI is published by National Bureau of Statistics of China.^[8]

The Israeli CPI (Hebrew: מדד המחירים לצרכן Madad HaMechirim Latsarchan) is calculated and published by the Central Bureau of Statistics.^[9]

Ireland's CPI is published by the Central Statistics Office Ireland.^[10]

Hong Kong's CPI is published by the Census and Statistics Department.^[11]

New Zealands CPI is calculated and published quarterly by Statistics New Zealand from prices gathered in a range of surveys at 15 urban areas.^[12]

• Fiat currency
• Core inflation
• Gross domestic product
• Harmonised Index of Consumer Prices (HICP)
• Hedonic regression
• Household final consumption expenditure (HFCE)
• GDP deflator
• List of economics topics
• Market basket (Basket of goods)
• Producer Price Index (PPI)
• Substitution
• RPIX

• Shadow Government Statistics
• Inflation Data by Country
• U.S. Consumer Price Index webpage

• U.S. Consumer Price Index historical PDF for printing

• UK Retail Price Index from 1915
• What's Wrong with the CPI? by William L. Anderson, Free Market, Vol.19 No.8, Ludwig von Mises Institute, August 2001.
• MSN Money - Contrarian Chronicles - 9 February 2004
• Safe Haven | Japanese Phantom Growth - December 15 2003
• Safe Haven | The Fed Said What? - December 13 2003
• MSN Money - Contrarian Chronicles - 3/29/2004
• How much is that today, Grandpa? Calculate CPI from 1665 to 2012.
• UK CPI calculator