Question: Is the Consumer Price Index (CPI) a cost-of-living index?
Answer: The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. The Bureau of Labor Statistics (BLS) has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI.
A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain “utility level” or “standard of living.” Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing, that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers’ well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would comprise a complete cost-of-living framework.
BLS: Consumer Price Index – Question and Answer
Two criticisms of the CPI-U are not discussed. One is the necessary limitations of the index: Despite its broad coverage of prices, the CPI-U does not track the cost of many factors that affect a person’s well-being – for example, crime, traffic, pollution, the prevalence of disease, the quality of education, and civil liberties. Cost-of-living measures rarely include such factors because few market prices or consumer expenditures are associated with them, making it essentially impossible to define and measure changes in their price or value.
A second criticism of the CPI-U is that, for technical reasons, the index may overstate changes in the cost of living. Such arguments of upward bias were stronger in the 1990s, before BLS instituted a number of technical improvements. Some analysts argue the opposite, that the CPI-U actually understates inflation. Those criticisms go beyond the scope of this brief.
CBO – Explaining the Consumer Price Index
Slate – The CPI and the Rat Race – New evidence on the old question of whether money buys happiness.
AARP – The Consumer Price Index: How It Impacts the Federal Budget and Social Security Benefits
Forbes – The Major Problem With CPI And How It Hurts The Economy
Mother Jones – Statistical Wonkery and Grandma’s Social Security Check
Forbes – If You Want To Know The Real Rate Of Inflation, Don’t Bother With The CPI
BLS – Some proposals to improve the Consumer Price Index
AEI – The coming health care inflation
BLS – Addressing misconceptions about the Consumer Price Index
It Would Be Great to Have Better Critics
Telegraph – Inflation: RPI, CPI and RPIJ explained
Consumer Price Index: Unreliable Measure of Inflation
BLS – Alternative Consumer Price Index Aggregations: Plutocratic and Democratic Approaches
Heritage Foundation – How To Improve The Consumer Price Index
The Real Britain Index: a more accurate measure of living standards
What official inflation figures aren’t telling us
Consumer Price Indexes (CPI-U) by Major Groups: 1990 to 2010
MIT – Sources of Bias and Solutions to Bias in the Consumer Price Index
Are There Good Alternatives to the CPI?
Congressional Budget Office – Indexing with the Consumer Price Index: Problems and Alternatives
CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists?
Slate – Don’t Let Economists and Politicians Hack Your Math
The CPI Trap – Have Republican revolutionaries outfoxed themselves?
Slate – How to Fix the Housing Component of CPI
Federal Reserve Bank of Cleveland – What is the Median CPI
CEPR – Carter, Reagan, Krugman and the Mis-Measured Consumer Price Index