Gauging Prices--and Spending

New CPI shows more inflation than expected

The nation's most widely watched measure of inflation by far is the Bureau of Labor Statistics' consumer price index. As inflation has embedded itself in American life, the CPI has become possibly the most important economic statistic issued by the Government. Escalator clauses tie the incomes of perhaps half of all Americans to movements in the CPI; among them are 8.5 million wage earners, 31 million Social Security recipients, 20 million people who receive food stamps, and 2.5 million retired military and federal employees. But the index has had two serious drawbacks: it is based on the spending patterns of only urban blue-collar and clerical employees, who now constitute less than 45% of the population, and it was compiled by pricing a "market basket" of goods and services compiled back in 1963.

No more. Last week the bureau began issuing not one but two new CPls. The first new index, still focused on blue-collar workers and clerical employees, updates their spending habits through surveys of family budgets taken in 1972-73 and rigorously analyzed ever since. The second (CPI-U) reflects the new spending patterns not just of wage earners but of "all urban consumers," including, for example, retired people and self-employed professionals; it is supposed to reflect the way 80% of Americans spend their money.

Unfortunately, both of the new CPIs showed inflation speeding up still more rapidly than had been supposed. Even the old CPI showed prices rising in January at an annual rate of 8.7%, about double the pace in November and December. But according to both of the new indexes, the rate was 10%, which reaches the dreaded double-digit range. The increase was exaggerated by ice and snow that snarled rails and roads in January, leading to shortages that jacked up food prices. But wholesale prices have been rising rapidly enough in the past few months to threaten more jarring consumer-price jumps. Julius Shiskin, the savvy Labor Department statistician who updated the CPI, concedes that the January jump is "cause for concern."

Had the news been better, announcement of the new indexes might have been a triumphant occasion. Shiskin regards them as "the best indexes in the world." To compile the old CPI, the Labor Department's 360 price inspectors (all but a handful of whom are housewives) had been checking the prices of some products that hardly anyone buys any more: pedal pushers, garter belts, bobby pins. Such obsolete articles were thrown out of the 400-item market basket and many newer ones substituted. The BLS shoppers will now price, for example, joggers' warmup suits, pocket calculators, birth control pills and wine.

The biggest change has been in the weights assigned to different categories of spending. The old CPI assumed that the typical family spent 34.9% of its budget on home furnishings and housing (mortgage payments or rent); CPI-U gives this category a 43.9% weight. The jump reflects both inflation in home prices and the determination of many Americans to make the home a very comfortable castle. Food went down from 25.2% to 18.8%. One reason: as people have more money to spend, they spend proportionately less on food. Also, consumers are eating out more; about a third of the food expenditures figured into CPI-U are assumed to pay for restaurant or snack-bar meals v. one-fifth in the old index.

Americans now spend almost as much of their budget (18%) on transportation--air travel, payments on the family car--as they do on food. But the relative importance of clothing purchases dropped from nearly 11% in the old CPI to 5.8% in CPI-U. Some reasons: the average family in the survey is smaller, 2.9 people v. 3.2 in the early 1960s. The population is getting older, and thus buys fewer new clothes. Young people tend to wear casual clothes, which cost less than the party dresses and formal suits of yesteryear.

Though Shiskin clearly regards the new urban consumers' index as the most sensitive measure of price trends, he was unable to get rid of the old index, which includes only wage earners. Labor leaders forced him to keep publishing it, but in revised form. Their argument: figures comparable to those used in the past are needed to determine wage increases under cost of living escalator clauses. Only the performance of the two indexes will show whether they made a wise decision. If CPI-U goes up faster than the new wage-earner index, union members may in the future demand that their wage boosts be tied to the broader measurement.

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