Academic journal article Monthly Labor Review

New Basket of Goods and Services Being Priced in Revised CPI

Academic journal article Monthly Labor Review

New Basket of Goods and Services Being Priced in Revised CPI

Article excerpt

New basket of goods and services being priced in revised CPI The Consumer Price Index (CPI) is being revised effective with publication of data for January 1987. As a part of the revision, the market basket of goods and services priced for the index is being updated to reflect how consumers are spending their money. Buying patterns can change over time as a result of changes in prices, demographic characteristics of the population, income, or tastes and habits. Historically, the Bureau of Labor Statistics has updated the CPI market basket approximately every 10 years. The uses of the CPI as a measure of inflation and the effects of economic policy, as a deflator of other statistical series, and as an income or benefits escalator require that it be current and accurate.

The last revision of the CPI market basket of goods and services took place in 1978 and was based on 1972-73 spending patterns. The revised 1987 CPI uses a market basket reflecting 1982-84 buying patterns. In addition, new definitions of some expenditure categories in the CPI are being introduced. This article describes how the market basket is constructed and compares the new basket with the previous one. Consumption changes that have taken place since the last revision are examined with respect to developments in prices, demographics, and other variables which may explain the observed market basket differences.

Construction of the market basket

The Consumer Price Ondex is a measure of the average change in the price paid by urban consumers for a fixed market basket of goods and services. The composition and relative weight of each component of that market basket is derived from estimates of expenditures from the ongoing Consumer Expenditure Survey. The expenditure data are tabulated using a heirarchical system with three principal levels of aggregation.

The seven major expenditure groups--food and beverages, housing, apparel and upkeep, transportation, medical care, entertainment, and other goods and services--are disaggregated into 69 expenditure classes, which in turn are divided into 184 item strata. Examples of item strata in the CPI include white bread, college tuition and fees, and women's suits. The expenditure weight for each item stratum is an estimate of total expenditure by the index population for that item. It is calculated as the product of estimates of mean expenditures of consumer units and the number of consumer units.

Mean expenditures are derived from 1982-84 Consumer Expenditure Survey data, and estimates of the number of consumer units are obtained from a special tabulation of the 1980 census files. A consumer unit is defined as: (1) all members of a particular household who are related by blood, marriage, adoption, or other legal arrangements such as foster parenting; (2) an individual who lives alone or who shares a household with others or lives as a roomer in a private home or lodging house or in permanent living quarters in a hotel or motel, but who is financially independent; or, (3) two or more persons who share living quarters and who pool their income to make joint expenditure decisions. Financial independence is determined by three major expense categories: housing, food, and other living expenses. To be considered financially independent, at least two of the three major expense categories must be provided by the respondent. The consumer unit concept is based on the economic interdependencies within a housing unit and thus differs from both the concept of family and of household. Families, by definition, exclude unrelated individuals and the household concept as used in other surveys includes all individuals who share living quarters, regardless of the economic interrelationships among the residents.

The process of compiling and calculating the expenditure weights takes about 3 years. During that time, the prices of the goods and services in the revised market basket may change. …

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