>> Steve Reed: Hi.
I'm Steve Reed, an Economist at the Bureau of Labor Statistics.
Today we're going to talk about one of the measures of
inflation that is produced by the BLS,
the Chained Consumer Price Index, or Chained CPI.
The objective of the CPI is to measure changes in the
cost-of-living for American consumers.
To do this, we price a market basket of all the
consumer goods and services purchased each month in
urban areas across the country.
The BLS publishes three official versions of the
Consumer Price Index each month.
You may already be familiar with what we call the CPI-U,
which measures changes in the cost-of-living for
all Urban Consumers -- and the CPI-W,
which measures changes in the cost-of-living for
Urban Wage Earners and Clerical Workers.
Today I want to focus on a relatively new measure of
inflation that's been in the news a lot,
the Chained CPI for All Urban Consumers.
So, what's the difference?
The Chained CPI differs from the U and W in
two important ways.
First, the weights or 'relative importances'
-- that is, the share of the consumer budget - of the
various consumer goods and services in the Chained CPI
are more current than the weights used for the U or the W.
For example, in the CPI-U and W for 2015 the
categories of goods and services that consumers buy
are based on expenditure surveys conducted in 2011and 2012.
So these weights are a few years old.
Consumer behavior can change a lot in just a few years.
Consider telephones.
In recent years, the use of land lines has fallen
dramatically, as cell phone use has
correspondingly increased.
The final chained CPI will correspond more closely to
how consumers are currently spending their money.
A second difference between the Chained CPI and other
CPIs is that the Chained CPI reflects how consumers
respond to changes in relative prices.
For example, suppose the price of beef increases this
month, but the price of chicken falls.
While some households may not change their buying
habits as a result of this relative price change,
at least some consumers will buy a little less beef and a
little more chicken.
The Chained CPI is unique among the CPIs we produce in
that it explicitly takes into account how much
consumers spend on goods and services in both months.
In short, since the Chained CPI uses more current
consumer spending patterns, and is designed to reflect
changes in actual consumer behavior.
The Chained CPI is designed to be a closer approximation
to a cost-of-living index than the CPI-U or the CPI-W.
Over time, the Chained CPI tends to increase at a
slightly lower rate than other measures of
consumer inflation.
For example, over the eleven-year period from
December 2001 to December 2013,
the Chained CPI rose at an average annual rate of
2.11 percent, compared to 2.33 percent for the CPI-U.
While we can say that the Chained CPI is a better
general or overall measure of changes in the
cost-of-living, there is a limitation of the Chained CPI
that people should be aware of when considering
which measure of consumer inflation to use -- namely,
the Chained CPI is subject to four quarterly revisions.
For example, Chained CPI indexes for August 2015 are
initially published in September 2015,
revised each of the next four quarters,
and aren't published as final until August 2016.
In contrast, when we publish the CPI-U and W indexes each
month, they are considered final when first issued.
The final Chained CPI needs both current prices and
current spending patterns.
While we can go to stores and collect the prices right
away, it takes many months to determine how much
consumers are spending on various items each month.
Finally, a potential limitation of all three
inflation measures -- the CPI-U, CPI-W,
and the Chained CPI -- is that they might not be the
best measure of the changes in cost of living for each
and every American.
All three measures are merely averages;
they measure changes in the cost-of-living for all urban
consumers or for urban wage earners
and clerical workers.
Each individual family, on the other hand,
has its own personal inflation rate.
Indeed, these three CPIs may not be representative of
specific individuals or individual families,
or even for specific groups of people,
such as senior citizens.
In summary, a goal of the Bureau of Labor Statistics
is to measure changes in the cost-of-living
for consumers.
We view the Chained CPI as a closer approximation to the
true cost-of-living index for the average consumer
than the CPI-U or the CPI-W.
However, as I noted the Chained CPI is subject to
four quarterly revisions before issued as final.
Thanks for taking the time to learn about the Chained CPI.
If you have further questions about the
Chained CPI, or about the CPI in general,
please do not hesitate to call the CPI information
staff at 202-691-7000, or cpi_info@bls.gov
Also, visit us on the web at bls.gov/cpi
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