Consumer Price Index:

Cost-of-Living Concepts and the Housing and Medical Care Components

GGD-96-166: Published: Aug 26, 1996. Publicly Released: Aug 26, 1996.

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Pursuant to a congressional request, GAO determined: (1) whether changes made to the housing component of the consumer price index (CPI) made it more or less suitable as a cost-of-living measure; and (2) the advantages and disadvantages of changing the current measurement of medical care costs to a cost of living measurement.

GAO found that: (1) the CPI is not a cost-of-living index, but a measure of the change in prices paid for a fixed market of goods and services; (2) a comprehensive cost-of-living index is broader in coverage than an index based on consumer expenditures and budgets; (3) the Bureau of Labor Statistics (BLS) uses the rental equivalence method to better measure housing costs within the CPI structure; (4) this method has made the CPI more suitable for measuring cost of living; (5) two-thirds of medical care expenses are excluded from the CPI, since they are paid by third parties payers; (6) including third-party payments in the CPI would move the CPI towards a cost-of-living index; (7) BLS excludes third-party payments from the CPI to better represent direct expenditures by consumers; (8) changing the medical care component of CPI would improve the formulation of health-care-specific policies and macroeconomic policies, but there is little technical feasibility in making such changes; (9) the Stigler committee believes that CPI should better reflect the cost-of-living index; (10) it is difficult to design a cost-of-living index for the federal government because of the additional uses of CPI; and (11) policymakers need to consider how the CPI will be affected by changing the medical care component and whether any single price index can account for such cost-of-living measurements.

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