The Chained Consumer Price Index: How Is It Different?

Publication Date: February 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Economics

Type:

Abstract:

The Bureau of Labor Statistics (BLS) of the Department of Labor publishes two important measures of inflation: the consumer price index for all urban consumers (CPI-U); and the consumer price index for urban wage earners and clerical workers (CPI-W). The CPI-W is used to adjust Social Security benefit payments, and the CPI-U is used to adjust the personal income tax brackets to keep up with inflation. As is the case with most economic indicators, the two CPIs are not without their flaws.

One of the difficulties in estimating changes in the cost of living is that consumer spending patterns change continuously. Spending patterns change because of changing tastes and also because of changes in relative prices. Over time, as prices change, consumers will tend to buy more of those goods and services whose prices are rising slower than average and fewer of those goods and services whose prices are rising faster than average. This substitution is believed to result in a CPI that overstates the effect of inflation on consumer well-being.

As part of the continuing effort to improve measures of change in the cost of living, BLS introduced a supplemental measure known as the chained consumer price index for all urban consumers (C-CPI-U). The C-CPI-U does not replace either of the current CPIs, and has not affected any current indexing provisions of federal government programs. The aim of the C-CPI-U is to produce a measure of change in consumer prices that is free of substitution bias.

Actual data for the C-CPI-U are now available beginning with December 1999. With the exception of the year 2000, the difference between the actual C-CPI-U and the CPI seems to be about 0.3 - 0.4 percentage point. In 2000, the increase in the CCPI-U was 0.8 percentage point less than the CPI-U.

That the CPIs are not revised makes them attractive for use in making automatic cost-of-living adjustments. The C-CPI-U is subject to two revisions after its initial release. If the C-CPI-U were to be used instead, either the adjustment would have to wait until the final number was available, or the adjustment would have to rely on a number that could change after the fact. The final C-CPI-U is only available two years after the reference date.

This report will be updated as economic events warrant.