Editor’s note: The following has been cross-posted from the U.S. Department of Labor blog. The writer is Steve Henderson. When not relaxing with a bowl of ice cream, Steve is a supervisory economist at the U.S. Bureau of Labor Statistics. He’s spent half of his government career working on the Consumer Price Index and half on the Consumer Expenditure Survey.
How much did you spend on ice cream last year? According to the BLS Consumer Expenditure Survey, the average U.S. household spent around $54. But why does BLS need to know that?
Let’s take a deep dive into that ice cream. That’s just one of thousands of data we collect to calculate the Consumer Price Index, a monthly assessment of price changes for goods and services in the United States. The CPI has separate inflation indexes for just about everything people purchase. For example, the CPI has an index for “Bacon and related products,” and lots of other itemized food categories, including “Ice cream and related products.”
(Curious about what else we measure? Here’s the CPI’s online table generator tool. You can drill down to the most detailed CPI categories in step 2. Note: You’ll need to enable Java to see the chart.)
Why so many indexes? The CPI needs to carefully track how the prices of food, and just about everything else, change because not every item’s price goes up or down at the same rate. For example, bacon has increased in price almost 32 percent over the past 10 years, while ice cream went up 21 percent over the same time period.
Looking at how prices have moved over the last year, bacon is slightly less expensive than it was in January 2016, while the price of ice cream has gone up slightly. This information is helpful for families looking to see where their food budget money went, as well as researchers investigating changing food prices and other indicators of inflation.
Most importantly, the CPI needs to know how much the average U.S. household spends on both of those two food items in order to measure the impact different inflation rates have on total inflation. If everybody spent the same number of dollars on ice cream as they do on bacon, then you could just use a simple average of the two inflation rates to get a total. Here is where BLS’s Consumer Expenditure Survey comes in. It measures, in great detail, all the different goods and services consumers purchase in a year, and passes these numbers to the CPI to form a “market basket” — that is, a list of everything people buy and what percentage of their total spending goes to each item.
The latest spending numbers showed that the average dollar amount per year that all U.S. households spent on ice cream was $54.04, while the average amount on bacon was $39.07. That means that ice cream has a greater importance than bacon when tracking inflation, not only in the Henderson household, but in the CPI. In other words, the more people spend on an item, the more inflationary changes to its cost will affect the total inflation rate.
Policymakers, researchers, journalists, government bodies, and others use the CPI to make important decisions that directly affect American citizens. U.S. Census Bureau analysts use CPI data to adjust the official poverty thresholds for inflation, and it’s one of several factors the Federal Reserve Board considers when deciding whether to raise or lower interest rates. Employers may use it to determine whether to give cost-of-living increases, and policymakers use the CPI when considering changes to allotments for things like Social Security, military benefits, or school lunch programs.
I hope this deep dive into ice cream spending helps you understand why the Consumer Expenditure Survey is so detailed.