It Is Always About the Definitions: The CPI Edition

Forget the names. It's all about the definitions. Here are some of them from the most recent CPI report covering January 2013:

The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services purchased by households. The Bureau of Labor Statistics publishes CPIs for two population groups:

(1) the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 29 percent of the total population

and (2) the CPI for All Urban Consumers (CPI-U) and the Chained CPI for All Urban Consumers (C-CPI-U), which cover approximately 88 percent of the total population and include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, and retirees and others not in the labor force.

The CPI-U (for all urban workers) is considered the official CPI. It increased at the rate of 1.6% over the last 12 months.

The CPI-W (for wage and clerical workers) increased by 1.5% in the same period. The CPI-W is important because this is the CPI that the COLA increases for Social Security are based on. And an added wrinkle, the Social Security COLA is not based on a year to year comparison of the 12 month averages (that is, for example, averaging the sum of the changes in the CPI-W from October 2011 to September 2012 and comparing this number to the changes in the preceding fiscal year October 2010 to September 2011). Instead only the third quarters are compared (the average for (July, August, September). This is a less accurate method because it does not take into account higher inflation in other quarters. Or to put it another way, the retired do not exist just in the third quarter of the year.

Then there is the Chained CPI which is a modification of the CPI-U. It is being pushed by the anti-old, austerity-minded as a replacement for the particular version of the CPI-W I just described above which already tends to understate inflationary effects on Social Security recipients. And there is the annoying Administration reference to it as the superlative CPI. Again context is important. The CPI survey collects information on prices. These are first averaged individually by geographic area. This is called "lower-level aggregation". The example which they use is the price of one item (apples) in one locality (Chicago). The BLS then does what it calls "higher-level aggregation" (note the use of the comparative): the price of apples regionally and nationally, the price of food nationally, the price of all items nationally, etc. The Chained CPI involves another level of analysis and what must follow the comparative but the superlative?

The use of a superlative formula for upper-level aggregation, used in the final C-CPI-U, is designed to address consumer substitution across item categories. In contrast, the CPI-U and CPI-W use a formula that assumes consumers do not substitute across item categories.

http://www.bls.gov/cpi/cpisupqa.htm

The example used is that the CPI-U and the CPI-W have prices for pork and beef. What the Chained CPI seeks to measure is, in the event of a price increase in pork, the effect of consumers switching to beef. The BLS example is, of course, innocuous. The one some of us are more concerned about is seniors being forced to choose between beef and cat food. Substitution basically reduces the effects of inflation. Calculating a CPI based on it will inherently be lower then others (CPI-U and CPI-W) which do not. What it ignores, some would say deliberately, is quality of life.

There is an experimental CPI for those 62 years and older (CPI-E) but its most recent data go only to 2009 and it's conclusions depend upon the weights assigned to various items, as for example, those medically related. A report based on the CPI-E concluded, for the 12 year period from December 1997 through December 2009, "the reweighted experimental price index for older Americans (CPI-E) rose 36.1 percent. This compares with increases of 33.9 percent for the CPI-U and 33.8 percent for the CPI-W."

http://www.bls.gov/cpi/cpieart2009.pdf

What is important to understand is that the various schemes to cut the size of the Social Security COLA, including the one currently in place are cumulative. You have no doubt heard of the miracle of compound interest. Well, what these schemes amount to is negative compound interest being charged against our seniors. What is always left off the table is the question of what constitutes a living retirement, perhaps because it would lead to the related discussion of what constitutes a living wage. Instead we get a numbers game, divorced from the very social issue the number is supposed to address.

(This began as a comment to http://www.correntewire.com/changing_the_name_but_not_the_game but took on a life of its own.)