The idea behind the CPI is to gauge overall price changes by selecting a set of items that represents what the average consumer buys, and then tracking the prices of those items as they rise and fall over time. The set of items includes frequently purchased items, such as food and clothing, as well as less commonly purchased items, such as televisions and tires.
Complications arise, however, when trying to use just one index to reflect the prices faced by different groups of consumers. For instance, a working consumer will probably spend a larger portion of income on clothes and transportation than a retired consumer will, and a consumer in San Francisco will probably spend more on rent than a consumer in Portland. To adjust for differing prices faced by consumer groups, the BLS creates a number of price indexes. This article provides a brief history of the CPI, discusses a few of the different indexes, compares recent trends in consumer prices in Oregon and in the nation, and illustrates how the CPI affects workers in Oregon.
It is possible for the index to come down as consumer prices fall. This rare event is called deflation and occurred most recently in 2009, brought on by the drop in oil prices after the previous year's steep price increase. A long-term decline in the average annual price index however has not occurred since 1955. The last extended period of deflation was during the Great Depression, when prices dropped in five out of 10 years in the 1930s, and fell almost 10 percent in 1932 alone!
More people are likely to remember the period of high inflation in the early 1980s, when high oil prices caused double-digit percentage increases in the CPI for three consecutive years. Since then, the annual growth rate in the CPI has hovered in the 1 to 5 percent range.
The CPI-U and the CPI-W use the same price data, but the weights that are given to each item when computing the indexes are different. The weight of an item represents its share of spending in the average consumer's total expenditure. The assumption is that the average working consumer will have different spending patterns than the population in general and will be affected by price changes differently depending on which items' prices change.
Different weights are calculated for 87 geographic areas as well. These areas are usually metropolitan statistical areas or a combination thereof, hence the CPI's claim to represent only urban consumers. The national CPI is reported as the city average of these areas, and averages for national regions are reported as well.
Table 1 compares the most recent Portland-Salem weights with the U.S. city average. Once again, the figures in Table 1 are for shares of total consumption, and do not compare prices of items across regions. The figures in the "point difference" columns are positive if Portland-Salem consumers spend a larger share of their income on the item compared with the U.S. city average, and negative if they spend a smaller share.
The table shows that, in general, residents in the Portland-Salem area spend a larger portion of their expenditures on shelter than the rest of the country, but spend less on household energy. Transportation for the average consumer in the Portland-Salem area is a smaller share of expenditures, except for wage earners and salary workers, who are apparently buying motor fuel to transport themselves to work.
|2009-2010 Weighted Importance of Components in the Consumer Price Index|
|U.S. City Average||Portland-Salem||Point Difference|
|Food and beverages||15.256||15.940||14.479||13.559||-0.777||-2.381|
|Household - Other||5.265||4.685||5.494||4.316||0.229||-0.369|
|Transportation - minus Motor fuel||11.412||12.016||10.425||10.899||-0.987||-1.117|
|Education and communication||6.797||6.800||6.878||7.684||0.081||0.884|
|Other goods and services||3.385||3.515||3.357||3.097||-0.028||-0.418|
|Source: Bureau of Labor Statistics|
The figures in Table 2 reveal the price increase in Portland-Salem over the year was 2.5 percent, slightly more than the Western urban areas and the U.S. city average, which both increased 2.3 percent. The average annual increase in Portland-Salem since 2001 was 2.1 percent, less than the Western urban areas and the U.S. city average increases of 2.2 percent and 2.4 percent. Over the 10 years, prices in Portland-Salem increased 23.1 percent, less than the U.S. city average increase of 27.0 percent.
The trend of Oregon prices rising more slowly than national prices has not always been the case (Graph 1). Back in the 1990s, Portland-Salem prices rose faster than U.S. city average prices every year.
|Consumer Price Index (CPI) and Recent Changes|
|CPI-U Change||2001-2011 Change|
|U.S. City Average||228.850||223.598||2.3%||27.0%||2.4%|
|U.S. West Urban||231.555||226.428||2.3%||25.5%||2.2%|
|Source: Bureau of Labor Statistics|
Oregon workers have a particularly close tie to the CPI because Oregon law links the minimum wage rate to the CPI. Oregon's law, which took effect in 2004, is tied to the national CPI-U. In the fall, the state's minimum wage rate for the upcoming year is recalculated using the percentage increase in the August-to-August CPI figure, if there was an increase.
The minimum wage increased each year along with the increases in consumer prices until 2010, when consumer prices fell over the year for the first time since the law took effect. The minimum wage law is tied only to increases in the CPI-U and not decreases, so the minimum wage in 2010 remained at 2009's level. Prices are on the rise again and the minimum wage increased to $8.80 per hour in 2012.