Consumer Price Indexes: Common Measures of Inflation

Consumer Price Indexes: Common Measures of Inflation

by Nick Beleiciks

February 2, 2017

The folks at the Bureau of Labor Statistics (BLS) are probably the world’s best shoppers, at least when it comes to knowing how much everything costs. For a variety of items from airline fares to wireless phone services, the BLS finds out how much things cost 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.

History of the Consumer Price Index

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 occurred most recently in 2009, brought on by the drop in oil prices after the previous year’s steep price increase. 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 change in the CPI has ranged between a low of -0.4 percent in 2009 and a high of 5.4 percent in 1990.

Defining the Consumers

The BLS’s most popular price indexes represent two types of consumers. The CPI-U is for All Urban Consumers, which represents about 88 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 29 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.

Oregon’s Consumption Patterns

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 County in Washington State.

The first table compares the most recent Portland-Salem weights with the U.S. city average. Once again, the figures in the table 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 with 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 larger portion of their expenditures on shelter than the rest of the country, but spend less on household energy. Transportation for the average consumer in the Portland-Salem area is a smaller share of expenditures, as are medical care, and education and communication.

Consumer Price Changes in Oregon

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 a few weeks after the time period it covers. The second table 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 second half of 2016 and is based on a 1982-1984 average of 100. The second column lists the level for the second half of 2015, and the third shows the annual percent change since the second half of 2015. The fourth column is the total percentage change from 2006 to 2016, 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 the second table reveal the price increase in Portland-Salem over the year was 1.5 percent, more than the West’s urban areas average increase of 2.0 percent and the U.S. city average increase of 2.6 percent. The average annual increase in Portland-Salem since 2006 was 2.2 percent, more than the West’s urban areas average of 1.9 percent and the U.S. city average of 1.8 percent. Over the last 10 years, the total CPI increase in Portland-Salem was 24.0 percent, faster than the total increase of 20.4 percent in the West’s urban areas, and the U.S. city average increase of 19.1 percent.

The recent trend of prices in Portland-Salem rising faster than the U.S. has been driven by rising housing costs in the Portland area. Spending on shelter represents 35 percent of expenditures by consumers in Portland-Salem. Since 2007, the price index for shelter in the area has consistently risen faster than the U.S. city average price index for shelter. Lately, the price index for shelter in Portland-Salem has been rising more than 6 percent each year.

The CPI’s Relation to Labor

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 to retirees and by labor unions when negotiating cost-of-living increases.

Oregon workers have a particularly close tie to the Consumer Price Index because Oregon’s minimum wage increases have been linked to inflation since 2004. The minimum wage was increased annually based on how much the CPI-U increased during a recent 12-month period. This link between Oregon’s minimum wage increases and the CPI is temporarily on hold as annual increases have been set by legislature through July 2022. Starting in July 2023, the minimum wage will again be linked to the CPI increase over the 12-month period through the most recent March.

More About the CPI

The Oregon Employment Department’s Workforce and Economic Research Division provides resources for obtaining more information on the CPI. Our email subscription service sends the latest Portland-Salem figures straight to your inbox. To sign up, visit and navigate to the Publications Subscription Order Form and subscribe to the Consumer Price Index under Reports and Analysis. There is also a CPI calculator that allows users to compare the purchasing power of a dollar in two different time periods.

Additional information about Consumer Price Indexes is available from the U.S. Bureau of Labor Statistics website.