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Chapter 14. PRICE STATISTICS

Uses and Users

The major price statistics programs of the U.S. Government are designed to provide comprehensive and detailed measures of price change at different levels of the U.S. economy. The data provided by these programs are used in analyzing and evaluating the Nation's economic health, in the formulation and evaluation of public policy, and in the implementation of public laws. Price statistics also form the basis for the escalation of wages, incomes, and other costs and are used to deflate current costs and values to constant dollar terms. The data form the basis for analyses of change from one time period to another and in some cases from place to place, item to item, or from industry to industry.

The programs of the Bureau of Labor Statistics (BLS) in the Department of Labor, which are the sole subject of this chapter, produce monthly measures of price change for the consumer and industrial sectors of the economy and rank among the most important statistical series produced by the Federal Government. The Consumer Price Index (CPI) is the principal source of information on trends in prices paid by consumers. The CPI is used in the formulation and evaluation of economic policy; in wage negotiations and collective bargaining; and for escalation of wages, pensions and a variety of other transfer payments in both the public and private sectors. For example, retirement annuities of Federal civilian and military employees and of social security recipients, and compensation payments to the families of Federal employees who are disabled or killed while working are escalated by changes in the CPI. In addition, Federal support for other programs, such as the school lunch program, the nutrition program for the elderly, and the Food Stamp program are also adjusted on the basis of CPI changes. Moreover, the income levels in the official

poverty statistics are updated each year by changes in the CPI.

The BLS producer price program is the major source of information on price changes in primary markets of the economy; that is, price change at the first commercial transaction for products sold in large quantities in open markets, and additionally is used as a precursor of changes in the CPI. The most widely known measure produced by this program is the Producer Price Index (PPI), formerly called the Wholesale Price Index (WPI), which provides detailed monthly data on price changes of products grouped by commodity type, stage of processing, and industry origin. Industry Sector Price Indexes are a second major output from the producer price program. These data, which measure price change for products produced by industries within the Standard Industrial Classification framework, are used to estimate “real output” in the system of national accounts prepared by the U.S. Department of Commerce. Aside from overall use as a macroeconomic indicator of price trends and in the evaluation and formulation of economic policy, data produced by the producer price program are widely used in escalation of long-term purchase and sales contracts and in market analysis in both the public and private sectors. Further, the PPI is used in establishing parity for sugar prices.

Data from the international price program are used in international negotiations, in analyzing the effect of import and export price changes on the U.S. economic situation, and in the assessment of the effects of U.S. Government policy decisions on balance of payments and trade.

The BLS price statistics program also includes periodic surveys and studies of consumer expenditures providing information on spending patterns, income, assets and liabilities of families grouped by different characteristics. Such data are used to determine and analyze variations in consumer spending habits and to form the basis for selection of items to be priced and weighting patterns required for periodic revisions of the Consumer Price Index. On an annual basis, the BLS price statistics program produces hypothetical family budgets for a four-person

'Federal civilian and military pension adjustments on the basis of CPI changes are required by 5 U.S.C 8240, 10 U.S.C 1401, 22 U.S.C 1121, and 50 U.S.C 402. Social Security and Railroad Retirement payments escalation on the basis of CPI changes are required by 42 U.S.C 415 and 45 U.S.C 231. Other statutes mandating changes in Federal programs based on CPI include: 42 U.S.C 3045, and 7 U.S.C 2016. The WPI's use in establishing sugar price parity is required by 7 U.S.C 1111.

city worker's family and for a retired couple at three The statistics on prices paid by consumers and on levels of living-lower, intermediate, and higher. The producer prices (including the industry sector prices program includes a comparison of the costs of these and stage of processing indexes) are regularly used by budgets in different areas of the country which the Joint Economic Committee of the Congress and provide an indication of differences in living costs by the Labor, Education, and Public Works Comamong areas. Currently, 39 metropolitan and 4 mittees of both the House and the Senate as well as nonmetropolitan areas are included in the program. other standing and special committees. Virtually Consumer expenditure and income data are used by a every Federal executive branch agency uses these wide variety of public and private agencies and data in preparing forecasts of economic events, in groups, and by individual firms in market research their analysis of program impact and in the process of studies, program planning, development and analyzing proposed legislation. In addition, the data evaluation, and in general economic research. from the BLS series are used by the Bureau of

Economic Analysis in its work on the national acImportant Federal Government uses include the

counts-specifically in deflating the accounts. (For use of these data: (1) by the Internal Revenue Service

more discussion of this point, see the report of the in updating the Optional State Sales Tax Tables; (2)

Advisory Committee on Gross National Product by the Department of Health, Education, and

Data Improvement.) In addition, the Council on Welfare in determining the poverty level and related

Wage and Price Stability uses all of the series, but analyses; and (3) by the Department of Energy in

particularly the detailed data on industry sector studying the impact of changes in energy costs on

prices and the CPI in analyzing specific price consumers. Family budget data are also used in both the public and private sectors to assess variations in

movements and their anticipated effect on the

economy. area living costs for administration of government programs, by private individuals comtemplating a change of residence, and for labor-management

The CPI is used by the public and the private sector negotiations involving regional or local adjustments

in wage and salary negotiation, administration, and in wages and salaries. As an indication of costs to

escalation. The PPI and CPI are used in commercial purchase goods and services at three hypothetical levels of living, the data for this program are also

negotiations, and in formulating business strategy. used in the administration and design of a variety of

Academics use the data in their analyses of the Federal as well as State and local income

functioning of the economy and the interrelationship maintenance programs.

of its components. State and local governments use

the data in much the same way as does the private The CPI and WPI (now called PPI) are specifically

sector. referenced in one or more Federal statutes. The WPI's legal basis dates back to 1891 when, according to the BLS Handbook of Methods (Bulletin The BLS price statistics are the principal, directly 1711), a U.S. Senate resolution "authorized the collected price data used for the purposes previously Senate Committees on Finance to investigate the noted and are principal inputs to the construction of effects of the tariff laws upon the imports and exp- the implicit price deflators of the gross national prodorts, the growth, development, production, and uct. The GNP deflator and other price measures are prices of manufactured articles at home and abroad.” discussed in the chapters on construction statistics, The BLS Family Budget Program is referred to by agricultural statistics, economic accounts, and statute (29 U.S.C. 882) which provides for the financial statistics. It should be recognized that development of "methods to establish and maintain wages, salaries, and compensation are special forms more comprehensive household budget data at of prices. These data, however, are discussed in the different levels of living...in regions and localities, section on labor statistics. In addition, a new project both urban and rural.” Other programs, such as the for preparing constant-dollar estimates of national BLS International Price Indexes (IPI) and Tuesday defense purchases is now being conducted by the Spot Market Index programs were originated in Bureau of Economic Analysis (BEA). This project, response to the programmatic needs or specific undertaken on a reimbursable basis for the requests of policymakers and analysts for the data. Department of Defense (DOD), is based on a sample An example of such a request is that which was made of DOD's records of purchases of goods and services by the Department of the Treasury which resulted in and from data collected directly by BEA from DOD the issuance, in January 1934, of a daily commodity contractors. The data are expected to be used for a price index—the precursor of the spot market price number of purposes including the construction of the index.

GNP accounts.

Advisory Groups

clerical workers (who account for about 40% of the

noninstitutionalized urban civilian population) and a The Bureau of Labor Statistics advisory groups are

new index covering the entire noninstitutionalized discussed in the chapter on labor statistics. A special

urban civilian population in urban areas (about 80% review of the Government's price statistics program

of the population). Rural areas within SMSA's are was undertaken in 1961 by the National Bureau of

also included. Economic Research under contract with the Office of Management and Budget (then the Bureau of the One of the major problems encountered by BLS in Budget). That review resulted in a report on The

the course of the CPI Revision program was the Price Statistics of the Federal Government, known as question of population coverage for the CPI. the Stigler Committee report (which was reproduced Historically, the index has been oriented toward the as part of U.S., Congress, Joint Economic Com- urban worker and the old CPI, in fact, covered only mittee, Government Price Statistics, Hearings..., the city wage earner and clerical worker population. January 24, 1961). The report described the programs

As a result of demographic and economic changes, as they existed and made a number of recom- and the growing importance of the CPI as a means of mendations for change—some of which, such as adjusting payments to individuals (such as retired expanding the CPI to cover the entire urban popula- persons) who are not included in the wage earner and tion and moving from import-export trade unit value

clerical worker population, pressures to both indexes to specification pricing have only recently

broaden the population base of the CPI and, in adbeen implemented.

dition, produce indexes for specific components of

the population have greatly increased. In view of the Some of the recommendations, such as the one to

strong trade union interest in maintaining the existing obtain PPI data from buyers, not sellers, so as to

Urban Wage Earner and Clerical Worker Index as an obtain actual transactions prices may have been

instrument which is "absolutely essential for overtaken by new technical approaches (subsequently

effective, responsible, and rational collective discussed), while others are now under active

bargaining" and the concomitant need for a more consideration. Still other recommendations, such as

comprehensive index, the CPI Revision program the one to produce a broadly based index of trans

resulted in the production of two indexes-a revised portation rates, have been accepted in principle and

index for Urban Wage Earners and Clerical Workers work has progressed on their implementation but ad

and a new CPI for All Urban Households. Both ditional work is needed. More recently, a review of

indexes will be calculated and published for a 3-year the PPI, with the cooperation of BLS, was arranged

period at which time it is expected that a by the Council on Wage and Price Stability. This

determination will be made as to whether one index is review, recently completed by the National Bureau of

adequate or both should be continued. While this Economic Research, coincided with a full-scale

particular issue concerning CPI population coverage ongoing examination of the PPI concepts and

has been at least temporarily resolved, the broader procedures by BLS staff.

issue concerning the need for a family of indexes has

not yet been decided. Data Issues

BLS has received numerous inquiries from various The conceptual and methodological bases of the

congressional committees, individual Members of Bureau of Labor Statistics' price statistics series are

Congress, and from other public and private groups described in the BLS Handbook of Methods (Bulletin

about the possibility of producing indexes for the 1711) and Major Programs: Bureau of Labor aged, the poor, and the rural population. Generally, Statistics (BLS Report 459). Major changes were

these inquiries stem from concern that the national introduced into the CPI as an integral part of the

CPI may not adequately represent the price recently completed revision program. Therefore, the

experience of a particular population subgroup, and description of the CPI program published in BLS

that the price change experienced by, for example, Bulletin 1517 and in BLS Report 459 describes the

retired individuals or the aged may vary from that program that was revised and not the new program.

which is experienced by the working-age population.

This concern has resulted in the introduction of bills Consumer Price Index (CPI)

to produce consumer price indexes for particular The CPI, which is compiled by the BLS, was

’Excerpt from statement of Leonard Woodcock, President, recently revised. This revision, the first in almost 15

United Automobile, Aerospace, and Agricultural Implement

Workers of America (UAW) before the Subcommittee on years, was completed early in 1978 with the pub

Priorities and Economy in Government of the Joint Economic lication of a revised index for urban wage earners and Committee, April 5, 1974.

groups such as the aged, retired individuals, and the poor. These bills have not yet been seriously considered by the Congress. Whether actual price experience does vary significantly and whether collecting these data would make a significant difference in the efficient and equitable allocation of Federal resources (particularly when balanced against the cost of collecting the data) are issues which require careful and thorough examination.

As in the case of consumer price indexes for specific population subgroups, local area consumer price indexes are not mandated by specific statutory requirements. However, for the revised Consumer Price Index program, price data is being collected in 85 separate pricing areas selected on the basis of the 1970 Census of Population. Of the 85 areas, 28 are self-representing and 57 are representative of the balance of the Nation's Standard Metropolitan Statistical Areas (SMSA's) and the remainder of the urban population. As a product of the revised CPI program, monthly or quarterly indexes are published for 28 urban areas as compared with the 23 local area indexes under the old program. The 28 indexes published as part of the revised CPI program represent a small fraction of the total number of requests which BLS has received, and continues to receive, for State, county, and city consumer price indexes. In partial response to this demand for more geographic detail, the revised CPI program has been designed to provide, for the first time, regional indexes for cities of different population-size classes. While this will provide individual areas for which a CPI is not compiled with a measure which is broadly representative of their particular situation, the issue of specific local area indexes still remains. This specific issue is, of course, just one indication of a much broader issue concerning the extent to which national statistical programs should be designed to yield local area detail (see chapter on Federal/State/local cooperative programs). Despite the efforts of numerous high-level commissions and study groups, no general solution to this difficult question has been developed.

noteworthy that the Department of Agriculture concluded that changes in prices paid by farmers for nonproduction items, such as food, clothing, recreation, and so forth, as determined through Agriculture's prices paid by farmers survey program, are similar to price changes as reported by BLS. Accordingly, the Department of Agriculture dropped its collection of these data and is using the BLS CPI data as inputs into Agriculture's parity price program.'

Present public policy, as established by Federal statute, does not require price data for local areas or for specific components of the population. Moreover, the collection of such data is extremely costly. Further, there is no mechanism currently in place with which to gauge the extent to which different parts of the population have different purchasing patterns—if in fact there are important differences. Fortunately, a mechanism for doing so is now being developed. Moreover, that mechanism, a continuing consumers expenditure survey, is designed to include the rural population. In addition, as noted before, the cost of collecting data for a consumer price index is very expensive and there is a significant question as to how far the Federal Government should go in providing CPI's for local areas when the Federal Government does not need such data for Federal purposes. These issues and questions and their implications for public policy decisions are all interwoven and should be examined. Until these issues and questions can be examined in some detail-in both analytic and policy terms—the policy that suggests itself is that the CPI coverage should not be expanded beyond that covered by the program as it now exists. With respect to data for component parts of the population, however, another factor needs to be considered. Present public policy, as expressed by statute, does not require data for population components. Moreover, most Federal uses of the data affect all population groups. Therefore, indexes for various population components should not now be created unless and until public policy, as expressed by statute, requires such an approach.

The question of the inclusion of rural areas in the CPIs coverage-thus further expanding its scope to 100% of the population-is also related to the issue of population and area coverage. When rural America was functionally separated from urban America, the rural population did not generally purchase many of the goods and services consumed in urban areas, and to the extent that they did, did so from markedly different types of purveyors. Times have changed and there is reason to believe that the purchasing and expenditure patterns of rural and urban America are now more alike than was formerly the case. It is

Frequency of Pricing

It has been argued that the frequency of pricing for the CPI should be expanded from that being used for the revised index (i.e., 52.8% of the value of the index items, based on the old weights which were derived from the 1960-61 Survey of Consumer Expenditures, are priced monthly with virtually all the rest being

'Items used by farmers in the agricultural production process continue to be studied separately by the Department of Agriculture. These items might appropriately be included in the BLS's industrial sector pricing program and consideration should be given to this possibility.

priced bimonthly) to the maximum monthly pricing possible. The basis for this proposal is that increasing the number of monthly previous price estimates beyond that being used (which is a significant improvement over the old procedure) will reduce or eliminate the average lag in the price index. The new procedure introduced in the revision program reduced the lag from almost three-fourths of a month to slightly more than one-third of a month. However, while data lags are always an important problem in making month-to-month comparisons, the issue appears to be one of price volatility and the weight associated with the lagged items with volatile price movements. If there is little or no month-to-month price movement, monthly price collection at any increment in program cost is too expensive. If there are infrequent but sharp monthly price changes the problem is how to identify those changes without instituting monthly pricing. To this end further study of the pricing is necessary. In such a study consideration should be given to arranging for some form of monitoring through publications and/or exception reporting (i.e., intermediate price change reports) in each important situation where prices would otherwise be collected on a bimonthly or less frequent basis. There may be severe problems in instituting and maintaining such a program within the operational constraints of the CPI. Nevertheless, if operationally and technically feasible, such an approach could produce up-to-date accurate quotations on items usually priced less often than monthly and at a considerably lower cost to the Federal Government than more regular monthly pricing.

expenditure survey would also form the framework for an improved family budget program.

The BLS has been instituting a continuing pointof-purchase survey for which funding was provided in FY 77. The President's budget for FY 78 provided for a Continuing Consumers Expenditure Survey (CCES) program. However, the program was delayed for a year until the CPI revision was complete so is being considered for the FY 79 budget. In planning the CCES, the Bureau of Labor Statistics should take into account the need for analyses of the income and expenditure patterns of major population components (e.g., the elderly, the poor population residing in urban areas and in rural areas, and so on).. This design work should be coordinated with the Department of Health, Education, and Welfare which is now planning a different but somewhat related study program, and the Bureau of Economic Analysis for estimates of personal consumption expenditures as an important part of the national income accounts.

Consumer Expenditure Data

The revision of the CPI market basket weights and the updating of pricing outlets has traditionally been accomplished through massive periodic (10-15 years apart) consumer expenditure and point of purchase surveys. This procedure, given the rapid pace of innovation, accompanying changes in consumer preferences, and the availability of modern statistical procedures, should be discarded in favor of a continuing data collection program that would both: (1) allow for the maintenance of a statistically reliable sample of pricing outlets (e.g., stores), and (2) the continuing analysis of the relative importance and changes of different classes of goods and services to consumers. Such information which is of importance in its own right also would permit more timely revision of the CPI market basket and weights when much revision is necessary.“ A continuing consumers'

Family Budgets

The family budget program provides data for three normative levels of living for a hypothetical family. It is used by many to form the basis for the evaluation of the adequacy of family income and in measuring place-to-place differences in living costs. In addition, the family budgets as published by BLS are used for many other purposes including wage negotiation. Nevertheless, the program as presently structured presents many conceptual and technical difficulties which give rise to serious questions as to the adequacy and suitability of the data for the purposes for which it is used. These deficiencies are thoroughly discussed in “Appendix 4: Bureau of Labor Statistics Family Budgets Program" to the HEW report The Measure of Poverty (April 1976) and to some extent in the BLS Handbook of Methods (BLS Bulletin 1910) on pages 82-86. A somewhat different viewpoint is to be found in the BLS Bulletin series 1570-1 to 6. In addition, a diametrically opposing view of the family budget program, arguing that the present formulation is correct and simply requires updating, has also been expressed by some users of the data series.

While the legislative requirement suggests that the program cannot be discontinued without statutory authority, the program does require major modification. Alternative and widely different conceptual approaches will be explored by a subcommittee of the Statistical Policy Coordination Committee, working in cooperation with a technical committee formed by BLS. These include, but are not limited, to:

‘Change in the market basket and in weights should be introduced probably not more frequently than about every 5 years.

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