An Experimental Consumer Price Index for the Poor

Family Economics and Nutrition Review, Summer, 1997

Each year, price inflation adjustments are made for various Federal, State, and local programs in the United States. In 1994, there were approximately 80 benefit programs that provided cash and noncash aid--primarily to persons with limited incomes. The benefit levels and eligibility guidelines for a substantial number of these programs are adjusted annually for inflation. For example, food stamp levels and poverty guidelines are adjusted using the Consumer Price Index for urban consumers (CPI-U) for food and all items, respectively. Does the CPI-U adequately reflect the trends in relative prices paid by the poor for goods and services? If the poor are faced with a different price inflation, what are the implications for governments providing benefits to these consumers and for the measurement of poverty in general?

The CPI-U measures the average change in prices paid by all urban consumers for a fixed market basket of goods and services. If low income urban consumers have different consumption patterns--for example, spend more of their budget on necessities than do higher income consumers--it is possible that a separate CPI for the poor would better reflect their situation. Other researchers have examined price inflation as experienced by those with lower incomes and concluded that inflation rates for the poor were similar--or, at least, any differences were not statistically significant--to inflation rates for the whole population. This study was undertaken to determine whether an experimental price index for poor consumers would be lower than, higher than, or equal to the current CPI-U.

Within the framework of the CPI program, the only way to construct price indexes for demographic subgroups of the population is to adjust the expenditure weights to represent those groups. So, to empirically compare the effects of price changes on different subgroups within the U.S. urban sample, it must be assumed that the distribution of prices paid for the same items, as well as differences in the quality of items purchased, is the same across population subgroups.

To obtain expenditure weights for the poor, data from the Consumer Expenditure Survey (CE) for 1982-84 and 199294 were used. Relative price data were from the Consumer Price Index program for 1984 through 1994. To obtain estimates for the poor population, data from urban consumer units interviewed between January 1982 and December 1984 were used.

Three definitions were used to define poor consumer units:(1) the income(2) poor who were complete income reporters with income below the poverty threshold for 1982-84 (n=1,542); the expenditure poor who had annual expenditures below the poverty threshold (n=1,267); and the program participant poor who received supplemental security income, public assistance, job training grants, food stamps, medicaid, or housing assistance (n=1,313).

Table 1 shows the demographic composition of all urban consumer units and each of the poor populations of consumer units. Compared with the all urban population, the poor populations contain a larger percentage of single persons, single parents, Black households, and older and younger households. There are smaller percentages of homeowners and married couples than in the overall population. The majority of reference persons in poor consumer units do not have a high school education.

Table 1. Percent distribution of the weighted Consumer Expenditure Survey sample by characteristics, 1982-84

                                     All
                                  consumer        Income
                                    units          poor
Characteristic                   (n=11,236)     (n=1,542)

Type of family
  Married couple, no children       22.1            6.5
  Married with children             31.3           19.4
  Other married couples(1)           4.8            6.6
  Single parent                      5.6           15.6
  Single person                     25.6           33.3
  Other families(2)                 10.6           18.6
Region
  Northeast                         23.4           21.6
  Midwest                           26.1           25.4
  South                             31.9           37.9
  West                              18.6           15.1
Program participation(3)
  Food stamps                        6.1           39.4
  Medicaid                           5.6           34.5
  General welfare                    3.7           19.8
  Housing assistance                 3.4           20.4
  Supplemental Security Income       2.9           12.7
Characteristics of
reference person
  Male                              67.5           43.3
  Black                             11.1           25.2
  Education:
    Less than high school           26.1           52.0
    High school graduate            30.2           23.9
    Some college                    21.3           15.3
    College graduate                22.4            8.8
  Age (years)
    Less than 25                     7.0            9.5
    25 - 44                         41.4           35.9
    45 - 64                         30.5           28.1
    65 or older                     21.1           26.5

                                 Expenditure     Program
                                    poor       participants
Characteristic                    (n=1,267)     (n=1,313)

Type of family
  Married couple, no children        5.3            4.7
  Married with children             13.6           18.5
  Other married couples(1)           6.2            9.6
  Single parent                     15.7           19.6
  Single person                     41.6           26.0
  Other families(2)                 17.6           21.6
Region
  Northeast                         21.8           25.5
  Midwest                           25.0           24.9
  South                             39.3           30.2
  West                              13.9           19.4
Program participation(3)
  Food stamps                       36.7           50.8
  Medicaid                          29.1           45.7
  General welfare                   21.6           32.2
  Housing assistance                17.3           25.4
  Supplemental Security Income      14.2           25.4
Characteristics of
reference person
  Male                              37.6           38.7
  Black                             29.4           30.3
  Education:
    Less than high school           63.7           54.9
    High school graduate            22.4           26.7
    Some college                    10.3           13.2
    College graduate                 3.6            5.2
  Age (years)
    Less than 25                    12.6            7.8
    25 - 44                         29.7           38.2
    45 - 64                         24.1           27.2
    65 or older                     33.6           26.8