Academic journal article Journal of Economics and Economic Education Research

The CPI Market Basket: A Review of Economic and Marketing Validity Issues

Academic journal article Journal of Economics and Economic Education Research

The CPI Market Basket: A Review of Economic and Marketing Validity Issues

Article excerpt

INTRODUCTION

The original impetus for the present article came from our School of Business and Economics' Marketing and Entrepreneurship Department (within the State University of New York College at Plattsburgh) acceptance, this in summer 2011, to take over the "Food Market Basket Data collection project". This project had been previously accomplished by a now defunct on-campus federally funded agency. This agency had been in charge of collecting, measuring, and reporting food price fluctuations by surveying three (3) conventional supermarkets and one Wal-Mart Supercenter, all located in the city of Plattsburgh, a rural setting (population of 22,000 people) in upstate New York, near the U.S./Canada border. The survey instrument utilized was composed of forty-one (41) food items. In September 2011, a quick perusal of the Consumer Price Index (CPI hereafter) food at home literature informed us that, within the last 20 years, major changes had occurred within food at home purchases by U.S. consumers. These changes, as reported by MacDonald (1995), were: 1. Shifts in consumer behavior such as in the case of decreased purchases in the food-at-home category because of increased purchases at restaurants; 2. Shifts in types of food purchases such as the purchasing of more "fresh" fruits and vegetables and less meat products; 3. Shifts in the Amount of new food products introduced in Supermarkets (for example, the number of new products introduced in Supermarkets increased from 5,400 in 1984 to 12,300 in 1992) and 4. Shifts in the amount and types of new retail outlets that sell food as in the case of a growing share of food sales occurring outside conventional supermarkets such as at drug stores, at warehouse club stores, at mass merchandisers (or general discount retailers), and at convenience stores as well. Because we were informed that our inherited 41-food item survey instrument dated back to 1978, we suspected that these issues and shifts had not been accounted for. Our team agreed that an assessment of our survey instrument's validity was in order. Our initial quick perusal of the CPI literature had equally revealed that there were a number of very important validity issues as to how the Bureau of Labor Statistics (BLS hereafter) computed the CPI that remained unresolved to this day. We decided that we would conduct an exhaustive literature review of both the CPI food at home category as well as the CPI's other goods and services since CPI validity issues would concern all products surveyed by the BLS, the federal government agency responsible for computing and publishing the CPI on a monthly basis. As we are marketing scholars and had neither previous knowledge nor experience with the CPI, we believed this effort would help us, first, to best understand the "benchmark" of price fluctuation indexes in the U.S. and, second, help us make improvements to our survey instrument.

WHY THE CPI MATTERS

As stated by Schultze and Mackie (2002) "the Consumer Price Index (CPI) is one of the most widely used statistics in the United States. As a measure of inflation it is a key economic indicator. It serves as a guide for the Federal Reserve Board's monetary policy and is an essential tool in calculating changes in the nation's output and living standards. It is used to determine annual cost-of-living allowances for social security retirees and other recipients of federal payments, to index the federal income tax system for inflation, and as the yardstick for U.S. Treasury inflation-indexed bonds." Invariably, as suggested by Boskin et Al. (1998) the CPI impacts the U.S. national budget and the national debt as well.

A DESCRIPTION OF THE CPI

Essentially, the CPI is a measure of the average change in prices paid by urban consumers for a fixed market basket of goods and services including food" (MacDonald, 1995).

According to Wahl (1982) the CPI is "simply a fixed-weight index for measuring changes in consumer prices between a base period and a subsequent period, the weights being established by the typical expenditures of all consumers in the base period". …

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