Inflation
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Abstract
Consumer Price Index When you hear a news item about inflation, chances are the reporter is talking about the Consumer Price Index (CPI). The CPI tracks the change in prices paid by urban consumers for a market basket of goods and services. That basket is made up of more than 200 categories, arranged into eight major groups: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. The CPI also includes governmentcharged user fees (such as auto registration fees) and taxes that are directly related to the sale of a good or service (such as sales taxes). More than 2 million workers are covered by collective bargaining arrangements that tie wage increases to the CPI. What’s more, the CPI is used to adjust tax brackets and transfer payments, such as Social Security. The prices of certain items within the CPI basket tend to change more than others. The “core CPI” is an attempt to control for that problem. It excludes food and energy, because their prices are often volatile on a month-to-month basis. The core CPI usually gives a better measure of where inflation is headed in the near future. Recently, the CPI has been criticized for overstating inflation, for a variety of technical reasons. Consider the problem of “quality bias.” “New and improved products often cost more because of their enhanced features. In theory, however, such improvements should not count as a net price increase to the consumer,” writes Kevin Kliesen of the St. Louis Fed. “Examples that improve living standards include new medical procedures and more energy-efficient central air conditioners. While difficult, accounting for this quality change is nevertheless necessary.” The Bureau of Labor Statistics (BLS), which compiles inflation figures and reams of other economic data, is refining the way it estimates the CPI in response to such criticisms.