We have a guest blogger for this edition of Commissioner’s Corner. Rob Cage is the Assistant Commissioner for Consumer Prices and Price Indexes at the U.S. Bureau of Labor Statistics.
The pandemic has changed my morning routine. Before the outbreak of the COVID-19 pandemic and full-time telework at BLS, two things motivated me each morning.
First, I was always on a mission to minimize my commute to work. I would do things each night so I wouldn’t waste time in the morning. Things like shaving, setting out clothes, and preparing the next day’s lunch. I timed my alarm to go off to allow just enough time to shower, suit up, grab that sandwich, and catch my commuter train as it rolled into the station.
The second thing I needed to start each work day was a strong, fresh, hot cup of joe—actually more like two or three cups. Not one of those fancy drinks with mocha, caramel, steamed milk, or anything like that. Ordinary drip-brewed, filtered coffee. Medium to dark roast and like Betty MacDonald, my coffee had to be “…so strong it snarled as it lurched out of the pot.” Then I add some cream (and by cream, I mean half-and-half), but no sugar. But by far the most important element of the drink: temperature. I like coffee precisely at a certain temperature. If it’s too hot, you taste nothing but a scalded tongue. If it’s too cold, you’re met with an overwhelming sense of disappointment. In that ideal temperate zone, you are jolted alive with a satisfying sip of silky cocoa and nutty fragranced bliss.
Through trial and error, I eventually unearthed a way to satisfy both of these morning habits efficiently: getting my coffee along the commute. Brewing the coffee at home took too much time, and I’d drink most of it on the train, arriving at my desk empty handed. Getting my first cup after I arrived was also uneconomical since I’d have to backtrack to get it. The simple solution? Find a place to get the coffee along the way, and preferably as close to my office as possible. This way, the temperature of the drink was in that sweet spot as I turned on my computer.
With four different coffee shops located along my route in Washington’s Union Station, one would think I could easily achieve this. But no, I’m foiled by impatience. According to a 2014 Journal of Consumer Behavior study, the time before ordering has the greatest influence on how customers perceive waiting times and service quality. A customer who has to wait 10 minutes in line before ordering will feel more dissatisfied than a customer waiting 10 minutes after ordering, even if the total wait time is the same. I couldn’t agree more. Queues at Union Station during the morning rush were just too long and unpredictable to meet my needs. I didn’t have the patience to wait behind customers pondering through a long order recital: Quad Grande nonfat extra hot caramel macchiato upside down, please. I needed my expeditiously stated, two-word order quickly. Luckily, the employee cafeteria in my building—conveniently located just off the lobby—had self-serve coffee. No competing commuters. No preorder queue. No postorder queue. Only a payment queue. I had found my routine: a 55-minute total commute, landing at my desk with strong, hot coffee in hand.
Then one day, I bumped into a coworker on the train. As we walked through Union Station and approached the maze of coffee shops with the insufferable queues, she stopped in front of one; took two steps to the left, scanned the drinks on top of a cart, found one with her name on it, picked it up, and met me back in stride. Amazed, I asked her how she pulled off this sensational stunt. She had placed her order on the coffee shop’s mobile app, of course. That was her routine. Curious but unconvinced, I asked her if she was concerned the coffee would be too cold by the time she picked it up. Through trial and error, she had figured out that if she placed her order on the app as the train rolled out of the L’Enfant Plaza stop, her drink would typically be hot and ready as she passed the cart. Could this be coffee-ordering nirvana? Guaranteed no-wait service, with guaranteed handoff at perfect temperature? Surely this improvement in the quality of the purchasing experience would cost more, which was my next question. And the astonishing answer: the coffee was the same price! I immediately downloaded the app, copied her process, and shaved three minutes off my morning routine. An equilibrium commute down to 52 minutes, about a 5-percent improvement!
Which brings me to how this tortured story relates to the business of BLS and specifically the measurement of the cost of living and consumer inflation. If the cost of my preferred cup of coffee was identical ($2.45 before sales tax) whether I stood in line to get it or not, then surely I would be better off by ordering on the app. Doing that resulted in a 5-percent time savings on my commute—an attribute of purchasing coffee that was critically important to me. In other words, the app-ordered coffee represented a higher-quality product, even though the price was the same. Using the federal minimum wage rate of $7.25\hour (or 12 cents a minute), an estimate of the time savings is 3 minutes x $0.12 = $0.36. One could say $0.36 is a reasonable estimate of the difference in quality. So what is the correct measure of price change between these two choices?
Ignore purchase time
|No change in price
Add purchase time
Assume purchase time is built into market price, and adjust prices to reflect zero purchase time
This is the million dollar question in consumer price index measurement, and the answer depends on how a unique consumer good—in this case a prepared cup of coffee—is defined. In the price index literature, the buzzword is homogeneity. To measure inflation accurately, goods that are homogenous must be identified and grouped together for proper treatment. This is at the core of getting the CPI right. Homogenous is defined as “of the same kind, alike; consisting of parts all of the same kind.” In CPI jargon, the component “parts” of a unique item in the sample are called “attributes.” So what are the attributes that define a cup of coffee? We could consider a list of attributes that most baristas might say are important, like size, bean variety, country of origin, blend, roast, freshness, or caffeine content; and a couple you already know that are important to me: temperature and queue time.
How many of these attributes do we explicitly control for in the CPI as obvious, overt, and separate variables used in scientifically selecting a sample of coffee drinks from quick service establishments, for use in calculating the index each month? You might be surprised by the answer: none! How, then, do we capture constant-quality price change for prepared coffee drinks accurately in the CPI?
We implicitly account for all of these characteristics one way or another. The CPI uses the matched-model approach to index measurement. We select a sample of 100,000+ unique, well-specified, strictly homogenous goods and services for the sample. Then we compare the price of each unique sampled item to the price of the exact same item in subsequent months. The key, of course, is defining and selecting the unique items. Generally speaking, sample selection has two major components: selection of the establishments (for example, a coffee shop) and then selection of a unique item (for example, 16-ounce dark roast drip coffee) at the selected establishments. Limited budget requires BLS to take a sample rather than a census of all goods and services consumers purchase. Thus, we group unique products into broadly homogeneous categories so the selected products can accurately reflect price change for unsampled items in those categories. We bundle prepared coffee from quick service establishments into the elementary category “limited service meals and snacks.” Comparatively, this is one of the more broadly defined components in the CPI basket. With a variety of different food and beverage items eligible for the sample, there are simply too many attributes to consider as separate selection steps to create the sample of unique items. Instead, we base the selection largely on the descriptions of different items listed on the menu. This is how we would distinguish an ordinary brewed coffee drink from other coffee drinks, such as a latte and cappuccino.
Any attribute expressly identified in the description of the menu item becomes a characteristic defining the unique item. For example, “12-ounce Cup of Organic Single Origin Light Roast Coffee” and “12-ounce Cup of Organic Classic Blend Medium Roast Coffee” may be two different menu items at a coffee shop. By rule, they are treated as distinct, unique, separate products for CPI sample selection. Then each month, CPI data collectors meticulously capture the price of the exact same product. If any of the characteristics change, that would trigger a quality review. Suppose medium roast was no longer available. A decision would have to be made to substitute the most comparable item to the originally selected item. Then a commodity analyst in the national office would have to decide if the new item was comparable to the old item. For example, is there a difference in quality between the light roast and the medium roast? Obviously, consumer taste and preferences are idiosyncratic, and the difference in quality of light roast and medium roast is a function of individual preference. But to the average consumer, perhaps not. In fact, prices tend not to vary by roast type. So in this situation, the analyst might judge medium and light to be comparable, and the price of the light will be matched to the previous price of the medium and used in the index. However, if a single-origin coffee was selected, a different outcome might result, especially if the price of the single-origin coffee was considerably different from a previously selected blend coffee, with all other characteristics being the same. Then a decision would need to be made as to how much of the difference was a quality difference (single origin versus blend), and how much was pure price change.
But what about the other factors that are not expressly identified in the description of the menu item, like temperature, freshness, and queue time? These are ostensibly identified, and held constant month after month, by the selection of the establishment. The outlet itself is associated with many attributes of product quality which are not observed. Over time, customers come to expect a certain level of service or product quality within each specific store, or at specific locations of chain stores. So, by controlling for the outlet, we are effectively able to hold constant these unobservable attributes.
Now that I am teleworking, my morning habits are out of equilibrium. My commute time is drastically shorter, reduced to the time it takes me to walk from my bedroom to the guest room, which has been hastily converted into a home office. My problem is the coffee. I haven’t figured out the roast, or the precise coffee-to-water ratio for the perfect strength; I don’t like spending time grinding whole bean, so I substitute ground coffee instead. My barista tells me that’s a quality decrease.
I’d say I am better off commute-timing wise but worse off coffee wise. A push. All in all, I can’t wait to return to on-premises work, mostly for that reliable cup of java.