CONSUMER PRICE INDEX

The Consumer Price Index (CPI) is a continually updated statistical survey of the prices consumers are paying for various basic goods and services. The Bureau of Labor Statistics (BLS) defines the prices it wants to track of a group or "basket" of about 2,400 typical consumer goods and services. (The "contents" of a basket can be quite varied, e.g., medical care, transportation, housing prices, or the current prices of entertainment, clothing, and food.)

Hundreds of BLS field representatives visit an average of 24,000 to 29,000 families and thousands of retail stores in 85 representative cities to determine the current prices paid and charged for each specific good. (A typical example of BLS inquiry might include, "Men's high work shoes, elk upper, Goodyear welt, size range 6 to 11.") During the next 20 days which follow visitations, government analysts use computers and complex computer programs to combine, sort, and refine all their price data, taking into account the fact that some goods play a more important role in the economy and in household budgets than others. (A change in the price of gasoline, for example, will have a much greater impact on a family budget than will a change in the price of toothpaste.) About the middle of every month, the Bureau publishes the CPI for the previous month. A typical BLS news release begins: "The CPI for all urban consumers rose 0.1 percent in February 1999 . . . to a level of 164.5 (1982–84 = 100). . . . For the 12-month period ended in February, the CPI has increased 1.6 percent."

The first attempt in the United States to use an index to compare price changes was prepared for the U.S. Senate in 1893. When labor and management began meeting to hammer out labor agreements in the early years of the twentieth century, they needed an accurate, official CPI so workers would receive automatic wage increases that kept pace with inflation. During World War I (1914–18), inflation accelerated, and an accurate CPI became more important than ever.

When Keynesian economic theory gained acceptance during the 1930s, the CPI became a tool government economists could use to fine-tune fiscal policy. For example, if the CPI showed that prices were falling, the government might become concerned that demand was weak and could lower taxes to stimulate consumer spending. As the twentieth century closed, the CPI remained one of the most closely watched measures of the health of the U.S. economy. Besides determining appropriate wage increases, the index was also used to calculate Social Security payment adjustments and income tax brackets.

See also: Inflation, Keynesian Economic Theory