Frequently Asked Questions about the Chained Consumer Price Index for All Urban Consumers (C-CPI-U)

[dkf]

http://www.bls.gov/cpi/cpisupqa.htm

What is the C-CPI-U and when did the Bureau of Labor Statistics (BLS) begin publishing it?
BLS began publishing the Chained Consumer Price Index for All Urban Consumers effective with the release of July 2002 CPI data. Designated the C-CPI-U, the index supplements the existing indexes already produced by the BLS: the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W).

The C-CPI-U employs a formula that reflects the effect of substitution that consumers make across item categories in response to changes in relative prices.

C-CPI-U data can be found on the BLS web site at http://data.bls.gov/cgi-bin/surveymost?su.

What is substitution and substitution bias? And does the C-CPI-U eliminate it?
Traditionally, the CPI was considered an upper bound on a cost-of-living index in that the CPI did not reflect the changes in consumption patterns that consumers make in response to changes in relative prices.

Since January 1999, a geometric mean formula has been used to calculate most basic indexes within the CPI; this formula allows for a modest amount of substitution within item categories as relative price changes.

The geometric mean formula, though, does not account for consumer substitution taking place between CPI item categories. For example, pork and beef are two separate CPI item categories. If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef. The C-CPI-U is designed to account for this type of consumer substitution between CPI item categories. In this example, the C-CPI-U would rise, but not by as much as an index that was based on fixed purchase patterns.

With the geometric mean formula in place to account for consumer substitution within item categories, and the C-CPI-U designed to account for consumer substitution between item categories, any remaining substitution bias would be quite small.

When did you decide to use a cost-of-living (COL) index as a framework for the CPI, and why is the CPI still not a COL?
The C-CPI-U does not represent a fundamental change in the underlying objective of the CPI. BLS has long used the concept of a cost-of-living (COL) index as a framework for dealing with practical questions that arise in the construction of the CPI.

While the C-CPI-U accounts for consumer substitution, the CPI still differs from a complete, or "unconditional," cost-of-living measure. While the CPI measures changes over time in the cost of consumer goods and services, an unconditional cost-of-living index would go further, and take into account changes in non-market factors, such as the environment, crime, and education. The CPI is said to be "conditional" on those factors.

How is the C-CPI-U constructed and how is it different from the CPI-U and CPI-W?
Both the CPI-U and C-CPI-U are indexes designed to measure price changes faced by urban consumers, while the CPI-W is designed to measure price changes faced by urban wage earners and clerical workers. Population coverage is the only difference between the CPI-U and CPI-W. The C-CPI-U is further distinguished from the CPI-U and CPI-W based upon the expenditure weights and formula used to produce aggregate measures of price change.

[MilesColtrane]

1. Substitution, like from Fancy Feast to SophistaCat?

(Thanks, I'll be here through Labor Day. Tell your friends!)

[Abq_Sarah]

2. The key word is "might"

The consumer "might" shift to something cheaper or might stop purchasing the item. The government shouldn't be basing inflation on people's ability to buy bulk rice and second hand clothing. Either prices are rising, or they're not.