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Definition of Chain-Weighted CPI
By Dr. David Edward Marcinko MBA
An alternative BLS measurement for the Consumer Price Index (CPI), removing the biases associated with new products, changes in quality and discounted prices.
The chain weighted CPI incorporates the average changes in the quantity of goods purchased, along with standard pricing effects. This allows the chain weighted CPI to reflect situations where customers shift the weight of their purchases from one area of spending to another.
Read more: http://www.investopedia.com/terms/c/chain-linked-cpi.asp#ixzz2FdiMs25f
Investopedia Example:
The chain weighted CPI incorporates changes in both the quantities and prices of products. For example, let’s examine clothing purchases between two years. Last year you bought a sweater for $40 and two t-shirts at $35 each. This year, two sweaters were purchased at $35 each and one t-shirt for $45.
Standard CPI calculations would produce an inflation level of 13.64%
((1 x 35 + 2 x 45)/ (1 x 40 + 2 x 35)) =1.1364
The chain weighted approach estimates inflation to be 4.55%
((2 x 35 + 1 x 45)/ (1 x 40 + 2 x 35)) =1.0455.
Using the chain weighted approach reveals the impact of a customer purchasing more sweaters than t-shirts.
Read more: http://www.investopedia.com/terms/c/chain-linked-cpi.asp#ixzz2FdiceVyv
BLS Application
- What is the C-CPI-U and when did the Bureau of Labor Statistics (BLS) begin publishing it?
BLS began publishing the Chained Consumer Price Index for All Urban Consumers effective with the release of July 2002 CPI data. Designated the C-CPI-U, the index supplements the existing indexes already produced by the BLS: the CPI for All Urban Consumers (CPI-U) and the CPI for Urban Wage Earners and Clerical Workers (CPI-W).
The C-CPI-U employs a formula that reflects the effect of substitution that consumers make across item categories in response to changes in relative prices.
Read more: C-CPI-U data can be found on the BLS web site at http://data.bls.gov/cgi-bin/surveymost?su
Substitution Bias
- What is substitution and substitution bias? And does the C-CPI-U eliminate it?
Traditionally, the CPI was considered an upper bound on a cost-of-living index in that the CPI did not reflect the changes in consumption patterns that consumers make in response to changes in relative prices.
Since January 1999, a geometric mean formula has been used to calculate most basic indexes within the CPI; this formula allows for a modest amount of substitution within item categories as relative price changes.
The geometric mean formula, though, does not account for consumer substitution taking place between CPI item categories. For example, pork and beef are two separate CPI item categories. If the price of pork increases while the price of beef does not, consumers might shift away from pork to beef. The C-CPI-U is designed to account for this type of consumer substitution between CPI item categories. In this example, the C-CPI-U would rise, but not by as much as an index that was based on fixed purchase patterns.
With the geometric mean formula in place to account for consumer substitution within item categories, and the C-CPI-U designed to account for consumer substitution between item categories, any remaining substitution bias would be quite small.
Assessment
Link: What ‘chained CPI’ could mean for Social Security
White Paper: http://www.bls.gov/cpi/super_paris.pdf
Conclusion
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Filed under: Health Economics | Tagged: All Urban Consumers, BLS, Bureau of Labor Statistics, chained CPI, Consumer Price Index, CPI, macro-economics, social security, Urban Wage Earners and Clerical Workers, What 'chained CPI' could mean for Social Security |
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Giving Less
Did you know that Democratic Rep. Keith Ellison (Minn.) just said that one part of a potential deal to avoid the so-called “fiscal cliff” is actually “a stealth way to give people less” and that he and other members of the House Progressive Caucus won’t vote for any plan that includes it.
Video link: http://www.huffingtonpost.com/2012/12/19/chained-cpi-keith-ellison-social-security_n_2333598.html
Dr. Harbinger
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C-CPI
This is just another economics machination to justify cost-of-living reductions to Social Security recipients.
Major
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How to snag a bigger Social Security check?
How and when you claim benefits can make a big difference in the benefits you’ll collect in retirement.
http://money.msn.com/retirement/a-bigger-social-security-check
Here are several scenarios.
Karlan
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Got milk?
A farm bill cut could bring the price of milk to $6-8/gallon under a Truman era law of 1949; or twice the wholesale price rate.
http://todaynewsgazette.com/milk-prices/
Even worse than the CPI.
Dr. David Edward Marcinko MBA
http://www.CertifiedMedicalPlanner.org
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Consumer Price Index for the elderly?
The Bureau of Labor Statistics calculates official price indexes for two population groups.
One is the Consumer Price Index for All Urban Consumers (CPI-U), which represents the spending habits of about 88 percent of the population of the United States. The other is the CPI for Urban Wage Earners and Clerical Workers (CPI-W), a subset of the CPI-U population, which represents about 29 percent of the U.S. population.
BLS also calculates an experimental CPI for the elderly, or CPI-E, by using households whose reference person or spouse is 62 years of age or older.
In 2009–2010, approximately 24 percent of all consumer units met the CPI-E’s definition of having a reference person or spouse 62 years of age or older.
Click to access 80chap15.pdf
Wexler
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CPI
I would anticipate inflation, regardless of how you calculate it, to become a significant threat to cash and short duration fixed income for the next 3-7 years. You can’t print and lend at our government’s pace without a byproduct!
The question is, who’s planning for that?
JOE
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