consumer price index (CPI)

Case Study The consumer price index (CPI) is not intended to be a comprehensive gauge of the cost of living that applies equally to everyone. It is reported in two separate measures, calculated to reflect the spending patterns of two groups: (1) all urban consumers and (2) urban wage earners and clerical workers. The first measure represents nearly 90% of the entire U.S. population and is the one reported in most media reports about inflation. The CPI does not accurately reflect expenditure patterns of the elderly, who tend to spend a larger than average proportion of their income on health care, and it does not reflect the spending patterns of people who live in rural areas. In addition, the CPI omits any consideration of quality of life issues such as health, safety, and the environment. For example, the CPI is unaffected if manufacturers choose to keep the cost of their products from rising by dumping large amounts of pollutants in the water and air. Some critics claim the CPI understates inflation. Producers sometimes choose to reduce service or size rather than raise prices. For example, has the real price of a hammer, ladder, or bicycle increased if shoppers have difficulty locating an employee who can provide knowledgeable assistance? Does spending more time in the checkout lane in a store that has cut back on the number of cashiers increase the real cost of goods purchased? The cost of housing is calculated as owners' equivalent rent, a measure that is unlikely to accurately reflect this important component of the cost of living for someone searching for a home to purchase. In short, the CPI has shortcomings that should be considered when inflation numbers are reported.