A misunderstand of Consumer Price Index weightings leads to accusations of our government abusing us.
After today’s release of the Consumer Price Index for August, I received this email message from a friend:
“In order to give the statistical appearance of things being better than they are, the BLS is going to reset their weighting for the CPI to only compare against 2021. This is being done with purpose to give the illusion next year that things are not as bad. 2021 was when Joe Biden’s inflation policies first surfaced. By comparing consumer prices to the timing when those prices first increased, the scale of future price increases will be statistically diminished. We are in an abusive relationship with our government.”
This is a quote from an article here. In the message from my friend, the last sentence was highlighted in yellow.
The writer, however, is wrong in how he interprets what BLS, the Bureau of Labor Statistics, is doing.
In order to calculate CPI, BLS gathers data about prices from across the nation for hundreds of items. Some are more important than others, because people allocate a larger share of their spending to these items. “Relative importance ratios represent an estimate of how consumers would distribute their expenditures as prices change over time.” (1)Relative Importance and Weight Information for the Consumer Price Indexes at https://www.bls.gov/cpi/tables/relative-importance/home.htm Food, overall, is allocated a weight of 13.370 (in the CPI-U index), meaning that BLS estimates people spend that percent on food. Housing is 42.363, transportation is 18.182, and so on. Everyone is different, but these are the best estimates of averages.
Weightings are important. The weighting, or contribution of eggs to CPI is 0.109 percent. In April 2021 I purchased a dozen eggs for $0.79. Today, $3.39. So while eggs have skyrocketed in price, the contribution to CPI and inflation is small compared to cereals and bakery products, whose weight is 1.030. In other words, cereals and bakery products are weighted about 9.5 times as eggs in relative importance in calculating CPI and inflation.
These weightings are revised from time to time to more accurately capture consumer spending preferences. In 1986 the weighting for eggs was 0.187. For food overall, the weighting was 16.190.
In the past, BLS revised weightings every two years. Soon, BLS will revise them every year: “Starting with January 2023 data, BLS plans to update weights annually for the Consumer Price Index based on a single calendar year of data, using consumer expenditure data from 2021. This reflects a change from prior practice of updating weights biennially using two years of expenditure data.” (2)Consumer Price Index Summary at https://www.bls.gov/news.release/cpi.nr0.htm This sentence was quoted in a red box in the article my friend sent me.
Based on this change, the author claims BLS is changing things to “give the illusion next year that things are not as bad.” This is simply wrong.
Undoubtably, the author of the article my friend sent me is referring to changing the base period of an index. This is a reference point for an index. Its value at this reference point is usually given the value 100. Most CPI numbers today use the years 1982 to 1984 as a base reference point and is given the value 100. The CPI today is 295.6, meaning prices are 2.956 times the 1982 to 1984 level. Or, alternatively, prices have risen by (295.60 – 100) / 100 = 1.956, or 195.6 percent since then.
The author must believe that BLS is changing the base period to 2021. If that were to happen, the price level for this month might be in the neighborhood of 110. That’s a lot less than 295.6, and this might lead some to believe that inflation is low or nonexistent.
But: Inflation is reported as a proportional change in the CPI index, not the absolute change. When we use proportional change, the choice of base period becomes a non-issue. The nearby example from a BLS publication shows that using two different base periods produces the same rate of inflation. (3)Math calculations to better utilize CPI data at https://www.bls.gov/cpi/factsheets/cpi-math-calculations.pdf
Another illustration: The CPI for August 2022, as mentioned above, is 295.6. In August 2021 it was 273.1 Now, 295.6 – 273.1 is a rise of 22.5 points in the CPI. But that is not the inflation rate over this period. That is 22.5 / 273.1 * 100, which is 8.2 percent. That is the year-over-year inflation rate. If we used a price index with a different base period, the increase would still be 8.2 percent.
To summarize: Even if BLS changed the CPI base period to 2021, the rate of inflation won’t change. Revising the weightings more often may result in very small changes as consumer spending preferences change, but these changes almost certainly won’t be noticeable to the public.
This is one way that conspiracies are started. A writer is uninformed, misinformed, or simply ignorant. Or, the writer may have the correct information and knowledge but is lying. Either way, a (apparently) authoritative article is published and used to advance a claim or theme: “We are in an abusive relationship with our government.” Some people will believe the lie.
This article has over 300 comments posted after it. Some drip with irony:
“Sundance gives a great tutorial. Yet, do not discount that the folks actually running the show in DC are actually pretty smart and also already have this exact same view and knowledge…Plus they even have reams of supporting data to dump into super computers.”
“I just don’t get it. I know they are doing this to us on purpose but what exactly is their final objective?”
“This will backfire, bigly. Maybe the millennials can’t do simple math, do not know history, are lazy, self-centered and emotionally unstable, HOWEVER, There are more people awake worldwide than NOT.”
|↑1||Relative Importance and Weight Information for the Consumer Price Indexes at https://www.bls.gov/cpi/tables/relative-importance/home.htm|
|↑2||Consumer Price Index Summary at https://www.bls.gov/news.release/cpi.nr0.htm|
|↑3||Math calculations to better utilize CPI data at https://www.bls.gov/cpi/factsheets/cpi-math-calculations.pdf|