New CPI to affect workers, elderly Index is used to adjust Social Security, labor cost-of-living pay

The economy

March 09, 1998|By KNIGHT RIDDER/TRIBUNE

WASHINGTON -- Two months ago, if you made a cell phone call, bought a candy bar from a vending machine at work or got Chinese takeout for dinner, the Consumer Price Index, which is supposed to measure the cost of living for Americans, wouldn't accurately record your expense.

But now the CPI has been reshaped to more clearly reflect the spending habits of Americans in the 1990s. The cumulative effects in coming years will be large, government experts say.

For many Americans the changes may be less than welcome.

The newly restructured lists of goods and services are expected to slow the government's estimate of the growth of inflation by six-tenths of a percent this year.

That means groups whose income is tied to the CPI -- such as 43.1 million Social Security recipients, 2 million workers covered by collective bargaining agreements with CPI clauses, and 22.6 million food stamp recipients -- will get smaller income increases.

To illustrate the effects of that drop, consider an elderly woman who receives a $500 monthly Social Security check. Since the CPI has gained 1.6 percent over the past year, she would get a cost-of-living increase of $8 per month, or $96 a year.

If the CPI rate of increase were reduced by 0.6, to 1 percent, she would get only $5 a month, or $60 a year.

The effect is likely to be multiplied over the next few years.

"Now we're measuring how people spend their money in the '90s instead of the '80s," said Patrick Jackman, chief economist for the CPI. "The changes will make it more representative of the behavior of the people today."

Some of the new items in the index include cellular phones and vehicle leasing.

Other items, such as tuition and computers, have been moved into a new education and communication category.

Food away from home

The food and beverages category was also restructured to reflect a national revolution in dining out. The "food away from home" section was increased from three categories to five.

The CPI can now distinguish whether we're buying food from full-service restaurants, from limited-service restaurants, at employee sites and schools, from vending machines and snack bars, or other food away from home.

The new selection of goods and services is based on the spending patterns of about 7,000 families surveyed in 1993, 1994 and 1995.

The index was previously based on the spending patterns of people surveyed from 1982 to 1984.

The surveys also helped the Labor Department redistribute the share of total spending allocated to each of the categories.

For example, the food and beverages category accounts for 16.3 percent of spending in January under the new system, while it would have been nearly 17.5 percent under the old system. Recreation rose to 6.1 percent, up from 4.3 percent before the changes.

The new marketbasket was used to measure the CPI for January, which rose 0.2 percent and is up 1.6 percent for the 12 months ending in January.

Some critics say more radical changes in the CPI are needed. A Senate-appointed commission that recently studied the index estimated that the CPI overstates inflation by 1.1 percent and strongly suggested several steps for the Labor Department to take to reduce the upward bias of the CPI.

Inflation overstated

Government officials acknowledge that the CPI does have some problems that cause inflation to be overstated and is taking action to squelch them.

Economist Jackman said workers who compile the CPI update one-fifth of the outlets they monitor every year based on location.

In the future, he said, workers would update outlets in product categories such as communications more often, while cutting back updates on those categories where outlets rarely change, such as gasoline.

Pub Date: 3/09/98

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