Kavan Choksi Discusses Whose Buying Habits Does the CPI Reflect
The Consumer Price Index (CPI) measures the monthly change in prices paid by U.S. consumers. CPI is calculated by the Bureau of Labor Statistics (BLS) as a weighted average of prices for a basket of goods and services representative of aggregate U.S. consumer spending. Kavan Choksi points out that the CPI is among the most prominent measures of deflation and inflation. The CPI report makes use of a distinctive survey methodology, index weights and price samples than the producer price index (PPI).
Kavan Choksi talks about whose buying habits does the CPI reflect
The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The BLS is known to collect about 80,000 prices monthly from about 23,000 retail and service establishments across the United States.
The all-urban consumer group represents over 90% of the total U.S. population. It is based on the expenditures of almost all residents of metropolitan or urban areas, including self-employed, unemployed, professionals and retired individuals. It also includes urban wage earners and clerical workers. Spending patterns of people who live in nonmetropolitan, rural areas are not included in the CPI. The spending patterns of people in institutions like prisons and mental hospitals, people in the Armed Forces, as well as those in farm households are also not included in the CPI. Consumer inflation for all urban consumers is measured by two indexes. These indexes are, the Consumer Price Index for All Urban Consumers (CPI-U) and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U).
The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is based on the expenses of households included in the CPI-U definition, which also meets specific additional requirements. These requirements are that more than one-half of the income of the household must come from clerical or wage occupations, and at least one of the earners of the household must have been employed for at least 37 weeks during the previous 12 months. The CPI-W population is a subset of the CPI-U population. It represents approximately 30 % of the total population of the United States.
Kavan Choksi mentions that CPI may not be an exact indication of one’s personal experience with price change. It is vital to note that the Bureau of Labor Statistics bases the market baskets and pricing procedures for the CPI-U and CPI-W population, as per the experience of the relevant average household, instead of any particular family or individual. For instance, if an individual spends a larger-than-average share of their budget on healthcare, and the cost of medical care is going up more rapidly than the cost of other items in the CPI market basket, then the personal rate of inflation of that person may exceed the increase in the CPI. On the other hand, in case fuel prices are rising faster than other times, but one heats their home using solar energy, they may experience less inflation than the general population does. A national average reflects millions of individual price experiences. It hardly mirrors the consumer experience of a specific person.
