[PEN-L:9436] The Experimental CPI Using Geometric Means

[Richardson_D <Richardson_D@xxxxxxx>]

The Experimental CPI Using Geometric Means
An experimental Consumer Price Index (CPI) for All Urban Consumers,
using a geometric mean formula to combine individual price quotations
at the lower level of aggregation while keeping the current Laspeyres
arithmetic mean formula for higher level aggregation, is being
introduced by the Bureau of Labor Statistics, U.S. Department of
Labor.  This experimental index, called the experimental CPI using
geometric means, or CPI-U-XG, is a supplement to the price information
available from BLS and does not replace the published CPI-U or CPI-W
indexes. BLS currently is evaluating the full or partial adoption of
the geometric mean formula in the CPI-U and CPI-W.
The current CPI, which is calculated using a fixed-weight Laspeyres
formula, does not reflect the fact that consumers can and do change
spending patterns as relative prices change.   Under certain
assumptions, a measure of change in consumer prices that uses a
geometric mean formula will successfully account for this consumer
behavior.  To the extent that those assumptions are accurate, the
index using geometric means will provide a closer approximation to a
cost-of-living index.
Each month in the CPI, prices of individual items are averaged
together to produce indexes for 9,108 item-area categories.  It is at
this first or lower level where the CPI-U-XG uses geometric means
instead of the Laspeyres method (arithmetic means) in the estimation
of price relatives.  At the second or upper level, these basic indexes
are combined to produce the All Items CPI as well as major group and
other intermediate indexes.  In both the official CPI-U and the
CPI-U-XG, basic indexes are aggregated at the upper level using the
arithmetic means and not geometric means.
The CPI-U-XG indexes are available for the period from December 1990
through February 1997 and will be issued in the future according to
the schedule set out below.  Historical differences between the CPI-U
and CPI-U-XG arise not only because of the different formulas used,
but also because of methodological changes made in the CPI-U since
1990 that are reflected in the CPI-U-XG for the entire series.  For
historical comparison to the CPI-U-XG, therefore, BLS also is issuing
an experimental Test Laspeyres series called the CPI-U-XL, which
differs from the CPI-U-XG only in the use of the Laspeyres formula for
aggregation of price quotations.
Over the period from December 1990 to February 1997, the CPI-U-XG rose
16.2 percent, compared with 18.6 percent for the CPI-U-XL.  The
average annual rate of growth in the CPI-U-XG over this period was
2.46 percent, 0.34 percentage points lower than the 2.80 percent
annual growth rate of the CPI-U-XL.  Among major item groups, the
largest differences between the two indexes were in food and
beverages, apparel and upkeep, medical care, and entertainment.
The January 1995 methodological changes in the CPI treatment of food
at home appear to have reduced the difference between the CPI-U-XG and
CPI-U-XL.  We expect to observe a further narrowing of the gap as a
result of additional changes made in June and July of 1996.
Beginning on April 22, the Geometric Mean and Test Laspeyres indexes
will be released monthly one week after release of the CPI-U.   These
series will not require special embargo procedures and are expected to
be available at approximately 8:30 a.m. on the morning of their
release.
Each month, the most recent data will be added to the historical
tables for the National All-Items, Major Groups, and Special Indexes
(food, energy, and all items less food and energy) that are available
on the Internet at http://stats.bls.gov/cpihome.htm. This information
also can be obtained from the Consumer Price Index information staff
at (202) 606-7000.  Indexes will be included quarterly in the CPI
Detailed Report, beginning with publication of first-quarter 1997
CPI-U-XG data in the April Detailed Report.  The CPI-U-XG and CPI-U-XL
will not be available on a seasonally adjusted basis.  Calculation and
publication of the CPI-U-XL will be discontinued after December 1997,
because that index is primarily of value for historical comparisons.
The relative movements in the CPI-U-XG will be studied as part of a
BLS research program to evaluate, item category by item category,
adoption of the geometric mean formula in all or some components of
the official CPI.  Scanner data, studies of substitutions between
brands, and other information will be used to assess the propensity of
consumers to substitute across items within individual item categories
as the relative prices of those items change.
By the end of 1997, BLS will announce the findings of its research,
including its determination of which CPI basic indexes are best
calculated with the geometric mean formula and when the implementation
of any change will take place.  The likely date for that
implementation is with the release of January 1999 CPI data.
BLS's best estimate is that use of the geometric mean formula in all
CPI basic indexes would lower the growth rate of the index by
approximately one-quarter of one percent per year. Partial adoption of
the geometric mean formula would be expected to have a downward impact
of between zero and one-quarter of one percent per year, depending on
how many, and which, indexes continue to be based on the Laspeyres
approach.
For current CPI-U-XG and CPI-U-XL data, or for further information,
write to the Bureau of Labor Statistics, Division of Consumer Prices
and Price Indexes, Room 3615, 2 Massachusetts Ave., NE, Washington, DC
20212-0001, or call Kenneth J. Stewart at (202) 606-7000.

Bureau of Labor Statistics
April 10, 1997