Market Basket of ‘80s Shapes CPI
The shoppers fan out each month across the country, visiting 19,000 locations--malls and 7-Elevens, hair salons and doctors’ offices, bars and restaurants--seeking prices on 80,000 items and services to help gauge the cost of living for Americans.
This is the way the consumer price index becomes a reality.
The dry details of statistical fact-gathering, usually of interest only to specialists, have suddenly become the focus of political debate. A Senate commission says the CPI overstates the inflation rate by 1.1 percentage points a year, and suggests corrections that could trim billions of dollars from Social Security benefits and raise billions more in taxes.
If the commission is correct, then a 3% inflation rate reported on the CPI would reflect a real increase of just 1.9%.
If Congress ordered government statisticians to adopt the commission approach, the result would be significantly smaller annual raises for Social Security recipients, military and civilian retirees, and workers whose union contracts are pegged to the CPI. The politics of the issue are highly volatile, and the hearing rooms of Congress might become statistical seminars.
The basis of the CPI is the “market basket” of goods and services purchased by urban consumers. The government makes periodic surveys, asking people what they buy and where they buy it. Once a decade, the results of the surveys are combined in the market basket.
The current one reflects purchasing patterns in the years 1982 through 1984. It shows that Americans devote 17.3% of their spending for food, 41.3% for shelter, 5.5% for clothing, 7.4% for medical care and 4.4% for entertainment, among the major categories.
The 400 shoppers who work part-time for the Bureau of Labor Statistics are responsible for getting price quotes on each of the items in the market basket. Changes in the prices of the items from month to month are tallied and adjusted for their share of the total consumption basket. The result is the monthly CPI, which has been issued since 1919.
It is a clear and singular figure, and has captured the public’s fancy as a yardstick of inflation. The “strength of the CPI is in the underlying simplicity of its concept: pricing a fixed (but representative) market basket of goods and services over time,” said the special commission, headed by Stanford economist Michael Boskin.
However, “its weakness follows from the same conception: the ‘fixed basket’ becomes less and less representative over time as consumers respond to price changes and new choices,” the commission said.
When beef prices rise, consumers eat more chicken. When the cost of golden delicious apples rise, they shift to Granny Smith varieties, Boskin noted.
New products are introduced, first costly and then affordable, for growing numbers of consumers.
“For instance, the VCR was introduced in the late 1970s at a price of $1,000 with clumsy electromechanical controls; by the mid-1980s the price had fallen to $200 and controls were electronic, with extensive preprogramming capabilities,” the Boskin report noted.
The CPI always lags the reality of the marketplace as tastes change and the market delivers new kinds of merchandise.
The next market basket update will be issued in 1998, reflecting consumer buying patterns in the years 1992-94. It will give weight to satellite dishes and cellular telephones, among other items that were rare in the 1980s but have become commonplace among upscale consumers.
The government experts are willing to concede that the lag in updating the market basket, and other defects, might overstate the cost of living by as much as 5%. They made some changes earlier this year that will trim the index by 0.2%, and more changes are slated for next year, with a more accurate way of accounting for health care costs.
