OLMIS

by Nick Beleiciks
Published Sep-24-2009

History of the Consumer Price Index Defining the Consumers Oregon's Consumption Patterns Consumer Price Changes in Oregon The CPI's Relation to Labor More About the CPI

The folks at the Bureau of Labor Statistics (BLS) are probably the world's best shoppers, at least when it come to knowing how much everything costs. For a variety of items from airline fares to wireless phone services, the BLS finds out how much it costs and uses that information to calculate the Consumer Price Index (CPI). The CPI, or more accurately the percent increase in the CPI, is the most commonly used measure of inflation. The index also provides the basis for cost-of-living adjustments and minimum wage rate increases. Projected changes in the CPI are often used for revenue and budget forecasting.

The idea behind the CPI is to gauge overall price changes by selecting a set of items that represents what the average consumer buys, and then tracking the prices of those items as they rise and fall over time. The set of items includes frequently purchased items, such as food and clothing, as well as less commonly purchased items, such as televisions and tires.

Complications arise, however, when trying to use just one index to reflect the prices faced by different groups of consumers. For instance, a working consumer will probably spend a larger portion of income on clothes and transportation than a retired consumer will, and a consumer in San Francisco will probably spend more on rent than a consumer in Portland. To adjust for differing prices faced by consumer groups, the BLS creates a number of price indexes. This article provides a brief history of the CPI, discusses a few of the different indexes, compares recent trends in consumer prices in Oregon and in the nation, and illustrates how the CPI affects workers in Oregon.

The BLS began publishing consumer price indexes for 32 cities in 1919. Indexes were created to calculate cost-of-living increases for wages during World War I, a period of rapid price increases. The national index was first published two years later and has been calculated annually since. The index has undergone six comprehensive revisions since that time. The most notable occurred in 1978, when the BLS began publishing separate indexes for the "all urban" consumer group and the "urban wage earner and clerical" consumer group. In 1987, the BLS recalculated the index base year, averaging the CPI to 100 for the years 1982-1984 and reporting all other years as relative to that base. Lately the BLS has added experimental indexes for smaller consumer groups such as the elderly, and has increased precision by reporting the index to three decimal places.

It is possible for the index to come down as consumer prices fall. This rare event is called deflation and has occurred in recent months, brought on by the drop in oil prices after 2008's steep price increases. A long-term decline in the average annual price index however has not occurred since 1955. The last extended period of deflation was during the Great Depression, when prices dropped in five out of 10 years in the 1930s, and fell almost 10 percent in 1932 alone!

More people are likely to remember the period of high inflation in the early 1980s, when high oil prices caused double-digit percentage increases in the CPI for three consecutive years. Since then, the annual growth rate in the CPI has hovered in the 1 to 5 percent range.

The BLS's most popular price indexes represent two types of consumers. The CPI-U is for All Urban Consumers, which represents about 87 percent of the population. The CPI-W is for Urban Wage Earners and Clerical Workers, which is a subset of the CPI-U and represents 32 percent of the population. For an urban consumer to be considered a wage earner, half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months.

The CPI-U and the CPI-W use the same price data, but the weights that are given to each item when computing the indexes are different. The weight of an item represents its share of spending in the average consumer's total expenditure. The assumption is that the average working consumer will have different spending patterns than the population in general and will be affected by price changes differently depending on which items' prices change.

Different weights are calculated for 87 geographic areas as well. These areas are usually metropolitan statistical areas or a combination thereof, hence the CPI's claim to represent only urban consumers. The national CPI is reported as the city average of these areas, and averages for national regions are reported as well.

There is a bumper sticker that reads, "Keep Portland Weird." To check if Oregon's consumption patterns are weird, at least compared to the rest of the country, we can compare the Portland-Salem, OR-WA consumption weights to the U.S. city average. The Portland-Salem combined metropolitan statistical area is the only area in Oregon where BLS calculates consumption weights. It consists of Clackamas, Columbia, Marion, Multnomah, Polk, Washington, and Yamhill counties in Oregon, and Clark and Skamania counties in Washington state.

Table 1 compares the most recent Portland-Salem weights with the U.S. city average. Once again, the figures in Table 1 are for shares of total consumption, and do not compare prices of items across regions. The figures in the "point difference" columns are positive if Portland-Salem consumers spend a larger share of their income on the item compared to the U.S. city average, and negative if they spend a smaller share.

The table shows that, in general, residents in the Portland-Salem area spend a smaller portion of their expenditures on household energy than the rest of the country. Portland-Salem area consumers spend a higher portion on housing than the U.S. city average. Transportation for the average consumer is also a larger share of expenditures in Portland-Salem, especially for those earning wages, who are apparently paying to transport themselves to work.

The U.S. city average CPI is published monthly. The Portland-Salem, OR-WA area CPI is published semiannually as a six-month average, released six weeks after the time period it covers. Table 2 contains the most recent CPI figures for the U.S., the Western U.S., and the Portland-Salem area. The first column is the average price level for the first half of 2009. The second column lists the level for the first half of 2008, and the third shows the percent change since the first half of 2008. The fourth column is the total percentage change from 2000 to 2006, and the final column is the average annual percentage change over the same time period. The table provides information about changes in prices only, and shows nothing that compares the absolute cost of items between Portland-Salem and the rest of the United States.

The figures in Table 2 reveal that the rate of price decrease in Portland-Salem over the year was -0.2 percent, slightly less than the Western urban and U.S. city average decreases of -0.6 percent. The average annual increase in Portland-Salem since 2000 was 2.2 percent, less than the Western urban and U.S. city averages of 2.9 percent each. Over the previous eight years, prices in Portland-Salem rose 21 percent, less than the U.S. city average increase of 25.7 percent.

The trend of Oregon prices rising more slowly than national prices has not always been the case (Graph 1). Way back in the 1990s, Portland-Salem prices rose faster than U.S. city average prices every year.

The CPI is far more than an interesting index of how much things cost. Since the CPI is the most agreed upon measure of inflation, it is used by the Social Security Administration to increase payout benefits and by labor unions when negotiating cost-of-living increases.

Oregon workers have a particularly close tie to the CPI because Oregon law links the minimum wage rate to the CPI. Oregon's law, which took effect in 2004, is tied to the national CPI-U. In the fall, the state's minimum wage rate for the upcoming year is recalculated using the percentage increase in the August-to-August CPI figure, if there was an increase.

The minimum wage increased each year through 2009 along with the increases in consumer prices. The August 2009 CPI-U index was lower than the August 2008 CPI-U index so consumer prices fell over the year for the first time since the law took effect. The minimum wage law is tied only to increases in the CPI-U and not decreases, so the minimum wage will remain at $8.40 per hour in 2010.

The Oregon Labor Market Information System provides resources for obtaining more information on the CPI. The latest national and Portland-Salem figures are available by visiting  www.QualityInfo.org and clicking on "Wages & Income." There is also a CPI calculator that allows users to compare the purchasing power of a dollar in two different time periods.