Consumer Price Index:

Impact of Commodity Analysts' Decisionmaking Needs to Be Assessed

GGD-99-84: Published: Jun 15, 1999. Publicly Released: Jun 15, 1999.

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Nancy R. Kingsbury
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Pursuant to a congressional request, GAO reviewed the Bureau of Labor Statistics' (BLS) decisions to substitute one product for another in its computation of the Consumer Price Index (CPI), focusing on: (1) how commodity analysts decide whether to make adjustments to the CPI; (2) the adjustment methods they use; and (3) how supervisors of commodity analysts review the analysts' decisions.

GAO noted that: (1) commodity analysts use a combination of professional judgment, general procedures, specific methods, and limited written guidance in deciding whether and how to make adjustments for substitutions; (2) in making adjustments, BLS' objective is to include only pure price change in the calculation of the CPI and eliminate price change that is the result of other factors; (3) commodity analysts receive and review information about the old and new versions of the commodity from which they make a series of determinations that revolve around whether the two versions are similar and, if not, which adjustment method to apply; (4) for items that are judged to be comparable, no adjustment is made; (5) when a substitution is not comparable with the item it replaces, commodity analysts either use a direct adjustment method to make an adjustment themselves or assign one of two indirect methods, in which case the BLS computer programs make the adjustments; (6) direct adjustments are made when the specific cost of a quality change can be estimated either by the manufacturer of the items or by using BLS' statistical models that incorporate price data; (7) when a direct adjustment is warranted but cannot be made, commodity analysts apply one of two indirect adjustment methods that impute a rate of price change; (8) both methods impute the pure price change by averaging the rates of price changes experienced by the same type of items in the CPI; (9) the class-mean method is generally used for products where new models or product lines are introduced fairly regularly; (10) it is based on the rate of price changes experienced by other substitutions in the particular geographic area; (11) the linking method includes all items of the same type and in the same location as the item in question, and it is most heavily influenced by items that had not changed; (12) according to BLS, there are no guidelines or policies in writing for supervisors to follow in selecting and reviewing the substitution decisions of the commodity analysts; (13) there is an unwritten policy that supervisors are to review substitution decisions when they consider the price increase or decrease to be too large; (14) BLS has no policy to randomly or otherwise select and review substitution decisions; and (15) GAO found no evidence to indicate whether errors or inconsistencies in commodity analysts' decisions or lack of comprehensive reviews has had a material effect on the calculation of the CPI.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: Following the issuance of GAO's report, BLS formed a task team to pilot and test options for meeting GAO's recommendation. In December 2000, this task team recommended that BLS develop written guidelines to assist commodity analysts' decision-making for certain groups of items in the CPI. In addition, the team made recommendations for periodic supervisory review. These recommendations were developed by a second task team that refined and piloted additional options. In April 2002, the second task team recommended that standard written documentation be developed for all the groups of items in the CPI, that the documentation be updated regularly, and that it be used by commodity analysts' in their decision-making. Furthermore, the team's report called for monthly supervisory review of the commodity analysts' decisions. GAO followed up in June 2003, and agreed with BLS to keep the recommendation open for another year. In July 2004, BLS reported that written documentation had been developed for 273 of its items and that it planned to develop documentation for the remaining 8 in the near future. Furthermore, a process for the monthly review of commodity analysts' decisions had been in place for 13 months, and had been reported on. Based on the fact that BLS had developed documentation for almost all its commodities, and was practising monthly supervisory review, we decided to close this recommendation as implemented.

    Recommendation: To help ensure that the CPI is protected from potential effects of errors or inconsistencies resulting from commodity analysts' substitution decisionmaking, the Commissioner of BLS should evaluate, on a periodic basis, the degree of consistency and accuracy in analysts' substitution determinations and the resulting effects on the CPI.

    Agency Affected: Department of Labor: Bureau of Labor Statistics


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