The 1998 Revision of the Consumer Price Index

Family Economics and Nutrition Review, Summer, 1998

The Consumer Price Index (CPI) is the principal source of information concerning trends in consumer prices and inflation in the United States and is one of the Nation's most important economic indicators. The measure is used by the private sector to adjust contract amounts and other payments among individuals and organizations. It is also used by the Federal Government to adjust payments to Social Security recipients, to Federal and military retirees, and for a number of entitlement programs such as food stamps and school lunches. An increase in the CPI increases Federal statutory obligations for these payments and programs. Individual income tax brackets and personal exemptions are adjusted for inflation using the CPI.(1)

The CPI is a measure of price change for a fixed market basket of goods and services of constant quantity and quality purchased for consumption. Consumers change their purchasing patterns in response to relative price changes, new product distribution patterns and marketing techniques, population and other demographic changes, and changes in consumer preferences. The CPI samples and weights are updated about every 10 years to reflect these changes and to maintain the Index as an accurate measure of current price inflation. The next revision in the market basket will occur in January 1998; other elements in the revision are expected to be completed in 2000. Included will be the reselection and reclassification of areas, items, outlets, and the development of new systems for data collection and processing.

Numerous methodological improvements in the CPI have taken place both within and without the revision framework (table 1).

Table 1. Improvements to the Consumer Price Index

Change                             Date
                                implemented

New construction                   1966
Quality adjustment of new          1967
  automobile prices
Sample rotation                    1981
Rental equivalence                 1983
Return from sale price             1984
  imputation
Rental equivalence                 1985
Enhanced seasonal                  1987
  products methodology
Quality adjustment of              1987
  used car prices
Aging bias correction              1988
Imputation procedures for          1989
  new cars and trucks
Quality adjustment of              1991
  apparel prices
Discount air fares                 1991
Sample augmentation                1992
New models imputation              1992
Hotels and motels                  1992
Seasonal adjustment                1994
Quality adjustment for             1994
  gasoline
Generic drugs                      1995
Food-at-home base period           1995
  prices
Rental equivalence                 1995
Composite estimator used           1995
  in housing
Commodities and services           1996
  base period prices

Change                       Description

New construction             Rent samples augmented with units
                               built after 1960.
Quality adjustment of new    New automobile prices adjusted for
  automobile prices            quality differences after model
                               changeovers.
Sample rotation              Introduced a systematic replacement of
                               outlets between major revisions.
Rental equivalence           Changed homeowners' component from
                               cost of purchase to value of rental
                               services for CPI-U.
Return from sale price       Introduced procedure to eliminate
  imputation                   downward bias for items discontinued
                               by outlets that went out of index
                               with discounted prices.
Rental equivalence           Changed CPI-W homeowners' component to
                               value of services.
Enhanced seasonal            Enhanced methodology used for seasonal
  products methodology         items by expanding the number of
                               price quotations to select products
                               from alternate seasons and eliminate
                               under-representation of such items.
Quality adjustment of        Prices of used cars adjusted for
  used car prices              differences in quality after model
                               changeovers.
Aging bias correction        Rental values adjusted for aging of
                               the housing stock.
Imputation procedures for    Price changes for noncomparable new
  new cars and trucks          models are imputed using only the
                               constant-quality price changes for
                               comparable model changeovers.
Quality adjustment of        Regression models used to adjust
  apparel prices               apparel prices for changes in
                               quality when new clothing lines are
                               introduced and eliminate bias due to
                               linking product substitutions into
                               the CPI.
Discount air fares           Substitution rules modified to expand
                               pricing of discount airline fares.
Sample augmentation          Increase in the number of outlets from
                               which prices are collected to
                               replace sample lost through sample
                               attrition.
New models imputation        Refined imputation methods used when
                               introducing products into the CPI.
Hotels and motels            Samples for hotels and motels
                               quadrupled to reduce variances
                               related to seasonal pricing.
Seasonal adjustment          Procedures for seasonal adjustment
                               revised to eliminate residual
                               seasonality effects.
Quality adjustment for       Treat "reformulated" gasoline as a
  gasoline                     quality change and adjust the price
                               to reflect quality difference.
                               Impact of the change estimated.
Generic drugs                Introduced new procedures that allow
                               generic drugs to be priced when a
                               brand drug loses its patent.
Food-at-home base period     Introduced seasoning procedures to
  prices                       eliminate upward bias in setting of
                               base period prices of newly
                               initiated items.
Rental equivalence           Modified imputation of homeowners'
                               implicit rent to estimate the upward
                               drift property of the current
                               estimator.
Composite estimator used     Replaced current composite estimator
  in housing                   with a 6-month chain estimator.
                               Under-reporting of 1-month rent
                               changes had resulted in missing
                               price change in residential rent and
                               homeowners' equivalent rent. Old
                               estimator also produced higher
                               variances.
Commodities and services     Extended food-at-home seasoning
  base period prices           procedures to remainder of
                               commodities and services series.
                               Base period priced left unchanged in
                               most noncomparable subsititions.