South-Western College Publishing - Economics  

Measure to Measure
Subject Inflation
Topic(s) Inflation; Consumer Price Index (CPI)
Key Words Inflation, Consumer Price Index, Consumer Expenditures, Bureau of Statistics, Council of Economic Advisors
News Story The Bureau of Labor Statistics reported that its key measure of inflation, the Consumer Price Index (CPI), has undergone a major renovation for the first time in more than a decade. Major changes to the CPI include:
  • The addition of a major category, education and communication, to the seven current categories. Communication, for example, will cover consumer expenditures on cell phones.
  • An improved statistical correction for quality changes, especially in the area of personal computers.
  • A revision in the relative importance of expenditure categories. Changes include a relative decrease in consumer spending on food, beverages, and transportation and an increase in housing and medical care.

These changes will be reflected first in the January 1998, CPI figure.

The overhaul is part of a series of planned revisions that has taken place over the past three years. The Council of Economic Advisers estimates that these changes will trim the CPI by 0.7 percentage points. Since the CPI is used to adjust Social Security and federal pensions, as well as other federal programs including food stamps, WIC, and the federal income tax system, a change of even 0.7 percent can mean significantly lower federal government outlays. (Updated May 19, 1998)

Questions
  1. How often is the market basket used to calculate the CPI changed
  2. The CPI has been criticized for overstating the rate of inflation. List some of these criticisms.
  3. Inflation is sometimes measured by the GDP deflator. What is the GDP deflator and how does it compare with the CPI?
Source Beth Belton, "CPI changes with the times," USA Today, February 23, 1998.

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