Calculating the price of everything: the CPI - consumer price index

Challenge, Sept-Oct, 1998 by Daniel Mitchell

Of course, the menu of indexes offered could be different from Figure 2 along the two dimensions shown. There could be more or different options available. And there might be choices along other dimensions. For example, there has long been demand for a CPI based on the consumption habits of the elderly for purposes of social security indexation. While the BLS could not produce every possible variant, it could do more than it now does to meet user preferences. But doing so means abandoning data-Taylorism.

Political Advantages of a Menu Approach

When an index such as the CPI is used for resource allocation, it is inevitably subject to politicization. I have already noted the past threats against the BLS that have arisen in Congress to force changes in CPI methodology. That problem is built into the current Taylorist approach. If there is only one right official CPI, and if that one right index is used for budgetary indexation, politicians will inevitably want to influence the index's movements. (The current controversy over whether the year 2000 Census of Population should be based on a strict head count or employ sampling is another example of this tendency.) But if a menu of indexes is offered, including those that meet the criteria politicians say they want, then they are free to choose that version.

Of course, with a menu of indexes, there could be no hiding behind the BLS in making such choices. A politician who wanted to limit increases in social security benefits or to raise taxes could pick a version of the CPI expected to rise more slowly than others. He or she could cite the Boskin Commission and hope voters would buy the explanation. But the choice would be political and voters could then decide whether the selection made was what they wanted. Meanwhile, policy-makers concerned with inflation, professional economists, and wage-setters negotiating union contracts, could make their own choices of the CPI, unfettered by political vagaries.

Follow the Precedent

Is there any precedent for the menu approach for the CPI? To a limited extent, there is. The various underlying subcomponents of the CPI are offered - for example, food prices - along with the overall index. And certain subindexes are routinely published, such as the "core" CPI that excludes volatile energy and food prices. But all of these series are based on the same underlying methodology.

A better precedent for the menu approach is found in the unemployment rate data produced by the BLS, where variants are presented that deviate from the standard definition. For example, one variant includes an allowance for part-timers who are seeking full-time jobs. Another incorporates "discouraged" workers. This menu of unemployment rates was developed because over time the BLS found that it was the best way to meet complaints of arbitrariness in the official definition. Providing alternatives allowed critics to pick their preferred unemployment rate. My proposal is to extend the menu approach to the CPI and to other official data series.