Consumer Price Index:
More Frequent Updating of Market Basket Expenditure Weights Is Needed
GGD/OCE-98-2: Published: Oct 9, 1997. Publicly Released: Nov 4, 1997.
- Full Report:
Pursuant to a congressional request, GAO reviewed the Consumer Price Index (CPI) market basket expenditure weights, focusing on: (1) the views of individuals who were knowledgeable of the CPI on updating the weights between major revisions to the CPI and the practices followed by other industrialized countries in updating their consumer price indexes; (2) the additional cost to the Bureau of Labor Statistics (BLS) to update the weights on a 5-year cycle; (3) the dollar effect on the federal budget if the weights were updated on a 5-year cycle; and (4) BLS' reasons as to why updates of the weights have only occurred during major revisions to the CPI, which have been about every 10 years.
GAO noted that: (1) the weight of professional opinion supported updating the market basket's expenditure weights more frequently than major revisions to the CPI have been made; (2) GAO spoke with 10 individuals who were knowledgeable about the CPI, and they were unanimous in believing that 10 years between updates was too long to reflect "current" consumer spending; (3) there was less agreement among the 10 individuals, however, on exactly how often updates should occur; (4) other major industrial countries update their consumer price indexes more often than the United States, according to information provided by BLS and contained in international publications; (5) however, BLS officials noted that some of these countries based their updates on national data that are not comparable to data used by the United States; (6) the cost of updating the expenditure weights is significantly less than the cost of a major revision; (7) BLS estimated that the cost to update the weights in 2003 would be about $3.1 million; (8) in comparison, BLS estimates that it will spend about $66 million on the upcoming 1998 revision; (9) because federal tax brackets and federal payments are adjusted for inflation, a CPI that more accurately measures inflation could affect the federal budget; (10) the Congressional Budget Office estimated that, assuming no other changes in policy or economic assumptions, if updating the weights in 2003 (5 years after the planned 1998 revision) reduced the CPI growth by 0.1 percentage point annually, the projected budget surplus would be increased by a cumulative total of $10.8 billion over the 4-year period of 2004 through 2007; (11) BLS cited several reasons for not updating the expenditure weights between major CPI revisions; (12) the foremost reasons, according to BLS, were a lack of empirical evidence to support more frequent updates and a void of theoretical guidance on how often to do them; (13) although theoretical guidance is not available on all facets of updating expenditure weights, such as exactly how often updates should occur, the preponderance of the data GAO reviewed supports the need for updating expenditure weights more frequently than about every 10 years; and (14) BLS' concerns about updating the expenditure weights between major revisions were indicated in June 1997, when BLS officials said that BLS has the technical ability to update the expenditure weights, but it must work through the challenging issues that now surround the CPI program.
Recommendation for Executive Action
Status: Closed - Implemented
Comments: The Bureau of Labor Statistics (BLS) announced on December 18, 1998 that it will update the expenditure weights every 2 years, beginning with the release of the CPI in January 2002.
Recommendation: As long as a fixed market basket CPI is published, the Commissioner of BLS should update the expenditure weights of the CPI's market basket of goods and services more frequently than every 10 years to make it more timely in its representation of consumer expenditures.
Agency Affected: Department of Labor: Bureau of Labor Statistics