Consumer Price Index and Colas

The CPI was begun during World War I. At this time, prices were increasing rapidly, particularly in shipbuilding centers. To deal with the fact that these price increases were eroding the buying power of wages, the federal government decided that an index on which to base cost-ofliving adjustments was necessary. To create such an index, household patterns of expenditures needed to be identified in order to create expenditure weights that would be used to compile the index. These data were collected in ninety-two industrial centers in 1917–1919. The BLS began the periodic collection of prices in 1919, and published indexes for thirty-two cities. Regular publication of the U.S. City Average began in 1921. At this time, indexes were estimated back to 1913. The first indexes were for wage earners and clerical workers.

As would be expected, the buying habits of consumers change substantially over time. In order to account for these changes, several household or consumer expenditure surveys have been conducted. After the 1917–1919 survey, others were conducted in 1934–1936, 1950, 1960–1961, and 1972–1973. In October 1979, continuous consumer expenditure surveys were introduced. A reason for continuous collection of these data is to have data available to update the CPI expenditure weights more frequently.

During these time periods many improvements in pricing and calculation methods were introduced. A Point of Purchase Survey was introduced in 1978. This survey made it possible for the BLS to collect prices directly, based on a new store-specific approach to select items. At this time, the BLS introduced a new index, the more broadly population-based CPI for All Urban Consumers (CPI-U). The CPI-U population included professional and salaried workers, part-time workers, the self-employed, the unemployed, and retired consumers in addition to wage earners and clerical workers.

The last two major revisions in the CPI took place in 1987 and 1998. With the 1987 revision, improvements were made in sampling, data collection, processing, and statistical estimation. Data from the consumer expenditure surveys of 1982–1984 were used for the expenditure weights. The 1980 census was the sample base, and the ongoing Point of Purchase Survey was used to select new item and outlet samples.

With the 1998 revision, another new market basket was introduced, along with methodological changes, a new system for data collection and processing, and a new sample base (the 1990 census). This is the sixth major revision in the CPI's history, and includes changes in the selection and classification of areas, items, and outlets. Several other improvements reflected in the current CPI were not part of a major CPI revision. For example, in 1983, a major change was introduced to separate shelter costs from the investment component of home ownership.