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Comparing Market Basket Changes and the CPI

Mary Lynn Schmidt


Consumer expenditures on specific items vary widely over time, consumers tend to maintain a pattern of expenditures for much longer time periods. The market basket of goods and services that make up the Consumer Price Index (CPI) is divided into seven major groups, such as food and beverages or housing. The pattern of consumer expenditures at this level changes more slowly than the components within a group. A Consumer Price Index is one of the most widely used economic indicators. It is a measure of the average change in the prices paid, in the United States, by urban consumers for a fixed market basket of goods and services. Knowing that consumers are constantly offered new items to include in their market basket, how do changing market baskets influence the CPI? The answer is not unambiguous and depends on the importance of the change in terms of total expenditures by consumers.

When the price of a commodity goes up or down it is usual to expect consumption of that commodity to go down or up, respectively, as a result. In fact, most of us frequently make such choices every time we go the supermarket. Price indexes are produced to provide government, business, and individuals a measure to compare prices over time and make informed decisions on economic behavior. Many believe changes in the Consumer Price Index reflects changes in their standard of living. Because the CPI is a modified Laspeyres index and keeps quantities fixed between revisions, it is a measure of price change not a true Cost of Living Index. The base period expenditure weights for the 1987 CPI revision relied on the 1982, 1983 and 1984 Survey of Consumer Expenditures (CE) and the 1980 Census of Population. While there were many improvements to sampling techniques, data collection, processing, and estimation associated with the 1987 revision, it also introduced a "rolling in" process for new areas replacing discontinued areas.

The BLS sponsors the Continuing Point of Purchase Survey (CPOPS) annually to provide an outlet frame to select outlets in which to price items for the CPI. This survey is used in combination with the now ongoing Consumer Expenditure Survey to select items and outlets in approximately one-fifth of the geographic areas (defined by the Bureau of the Census for the Current Population Survey) included in the CPI each year. Since the 1987 revision, two years of the most recent Consumer Expenditure Survey data are used in selecting items being rotated each year (Marcoot, 1985). New items and outlets selected for the 1994 CPOPS were based on the 1992 and 1993 Consumer Expenditure Survey data. Thus, new items and new outlets are being introduced in twenty percent of the pricing areas annually. The entry level item reselection has gradually changed the composition of the entry level items being priced.