The biggest contributor to the CPI-U rise in June was a sharp increase in the gasoline price index, while other energy price indices were mixed, with the electricity price index rising and the natural gas and fuel oil price indices falling. The largest contributors to the rise in the core CPI-U were increases in the housing, medical care, and apparel price indexes. In addition, the price indexes for new cars and home improvement and furnishings rose. The price indexes for airfare, used cars and recreation and leisure fell.
What is the CPI
The Consumer Price Index (CPI) is a measure of the average change over time in the prices of goods and services that residents consume on a daily basis.The CPI is based on more than 80,000 price quotes from U.S. consumers over the course of a month on a basket of goods and services they consume on a regular basis. The compilation of the CPI is very complex, combining economic theory and statistical techniques, so the U.S. government's team that compiles the CPI brings together economists, statisticians, computer specialists, data collection specialists, and other professionals. The CPI surveys rely heavily on the voluntary cooperation of individuals and organizations across the country, and those surveyed are not coerced or paid.
The CPI is released monthly by the Bureau of Labor Statistics of the U.S. Department of Labor, which publishes the price index for the previous month in the second or third week of each month.
Series of CPI Indicators
The CPI index system consists of the following sub-indicators:
CPI-W (The CPI for Urban Wage Earners and Clerical Workers) is the earliest series released, and the index covers a group of people that includes urban and rural wage earners and clerical workers, which accounts for The index covers urban wage earners and employees, accounting for 32% of the total population (according to the 1990 census). The index is mainly used to adjust the annual cost of living standards in the social security system; it is also used as a reference for wage levels in labor negotiations.
The CPI-U (The CPI for All-Urban Consumers) was first published in January 1978, and is the most popular indicator. The CPI-U adds professionals, managers, skilled workers, self-employed, short-term temporary workers, the unemployed, the retired, and other groups not belonging to the labor force to the population of the CPI-W, and the population coverage is very high. population, the population coverage is greatly increased to 87% of the total population.
C-CPI-U (Chained CPI for All Urban Consumers) is the most recent series and covers the same population as CPI-U. The Department of Labor has been providing the CPI-U since August 2002, when it was launched. The Department of Labor began releasing the index in August 2002 for the period since January 2000, when it began publishing the index. The price sources for the index are the same as in the previous two series, but the formula and weights are different. The chained CPI formula takes into account the "ability" factor, i.e., the ability of consumers to achieve the same standard of living. Because some of the data are not immediately available, the CPI is released initially, with two subsequent revisions.
The core CPI is a consumer price index that removes food and energy. Food and energy together account for 22.6% of the CPI's weight and are prone to large fluctuations, so some economists pay more attention to trends in the core CPI.
CPI weight setting
CPI is a fixed-weight index, also known as Laspeyres Index (Laspeyres Index), i.e., weighted by the consumption of the base period to calculate the total index, proposed by the German statistician Laspeyres in 1864. The base period is selected and the price index is set to 100, and when the base year changes, the CPI for the current year is adjusted accordingly.
Based on the U.S. Department of Labor's annual Consumer Expenditure Survey (CES), the basket of goods is adjusted every few years to reflect changes in purchasing preferences and changes in the types of goods available. Between each adjustment, the proportions within the portfolio remain constant. Therefore, one of the drawbacks is that changes in the CPI do not reflect changes in consumption patterns over a relatively short period of time.
In December of each year, the Department of Labor adjusts the "relative importance weights" based on the relative price changes in each of the subcomponents of this fixed portfolio.
Table 1 CPI Relative Importance Weights (DEC. 2006)
Source: U.S. Department of Labor
Housing Rent is the Largest Component of the CPI
As can be seen in Table 1, the largest component of the CPI is housing, which accounts for 42.7% of the CPI weight. Housing can be divided into three items: residence (shelter) 32.8%, fuel and utilities 5.3%, household goods 4.7%. Residence is divided into four items, the most important of which is the owners of equivalent rent (OER), accounting for 23.8% of the weight of the CPI; rent (Rent of primary residence) accounted for 5.9%, these two rent items account for about 30% of the weight of the CPI, and the other two are also related to housing rental. The other two items are also related to housing rent. Thus, rent is the largest component of the CPI.
Before 1983, the U.S. Department of Labor used the asset price method to measure the cost of owner-occupied housing, the purchase of housing as a form of consumer goods. This method has a drawback is that the cost of residential mortgage to purchase a home to be included in the interest, when the mortgage interest rate changes dramatically, the project will have very large fluctuations, can not truly reflect the actual market price. 1983, the Department of Labor introduced the concept of rental equivalence (rental equivalence), that is, with the same area of the same type of housing rental level to measure The Department of Labor introduced the concept of rental equivalence, which is measured by the level of rent for similar housing in the same area and substituted for the price of housing in the CPI.
Rental and landlord equivalence rents are derived from large samples, covering a wide range of geographic locations and levels of rent. Because rent levels change so slowly, some particular units are sampled at that price level only once every six months. That's why the CPI lagged behind the U.S. real estate bubble that had formed before the subprime crisis.
There are two differences between the two rent components. First, the raw data are weighted differently, reflecting the difference between homes rented as apartments and owner-occupied homes. Rental housing is generally small apartments with few amenities, multi-family structures, and average neighborhoods, while owner-occupied housing is mostly single-family structures, large homes, and high-level neighborhoods. Secondly, utility bills are handled differently. Because utilities are usually paid by the landlord, but are included in the rent data, the Department of Labor excludes them from the calculation of equivalent rent (OER).
Historical Adjustments to the CPI
Since the release of the CPI, the data has been the subject of much public scrutiny, as well as occasional criticism and skepticism from economists and users of the information. The U.S. Department of Labor has continued to revise its calculation and statistical methods and improve its sources of information to more accurately reflect trends in the prices of goods and services in the consumer sector.