Three Strengths of the Consumer Price Index & Three Weaknesses of the Consumer Price Index
Original post by Tom Gresham of Demand Media
The Consumer Price Index (CPI) measures the price of a representative group of products. Two main CPI measurements are made. One is the CPI for Urban Wage Earners and the other is the CPI for all Urban Consumers. The latter index is the one that economists and others track most closely. The U.S. Department of Labor's Bureau of Labor Statistics measures the CPI.
Consistency and Flexibility
Two critical strengths of the CPI are its consistency and flexibility. Its consistency reflects that it is measuring the costs of a set of goods that remains consistent in representing the costs that average consumers face, even as the goods that are included in the CPI evolve with changes in the marketplace. This consistency ensures that the CPI is measuring similar costs from year to year. The CPI's flexibility refers to the various versions of the CPI that are made that take into account outside factors, such as seasonal adjustments and consumer choice.
Another strength of the CPI is its influence. It is one of the most highly viewed economic indicators, and its calculations can impact both equity and fixed-income markets and the Federal Reserve's monetary policy, according to Investopedia. It also goes far toward shaping public opinion about the state of the economy, and analysts use it to generate predictions about where trends are heading. It even is used to adjust such mechanisms as pensions and Medicare.
Inflation Concerns and Living Costs
The CPI is often used to demonstrate inflation, but concerns have arisen about its accuracy in that area since changes were made to transform the CPI from measuring the costs of goods to the cost of living. In particular, it began to consider changes in the quality of goods and consumer purchase decisions because of of price changes. Some economists now believe the CPI understates inflation, according to Investopedia. Also, the CPI is limited in its capability to show a full picture of changes in living costs because it does not consider all costs, such as taxes.
According to the Bureau of Labor Statistics, an admitted problem with the CPI is that it does not represent the experiences of all demographics of consumers. In particular, the most-watched CPI for Urban Consumers does not measure the climate for rural consumers -- the two may differ considerably. Also, the CPI does not include separate statistics for demographic groups, so if prices vary for consumers in different demographic groups it will not be reflected in any CPI-based measurements.
- Investopedia: Economic Indicators - Consumer Price Index
- Bureau of Labor Statistics: What Are Some Limitations of the CPI?
About the Author
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in the "Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.