Americans prepare been complaining about the cost of living since Colonial days. But actually measuring it, and determining how it changes concluded time, have always been a challenge. It was just a century ago, in 1921, that the U.S. government started publishing a nationwide Consumer Price Index (CPI), based on living costs across major cities.
The CPI remains the most-quoted measure of vigorous costs today, providing a record of how costs have changed from year to year and ample evidence for the complainers that few fashions are as cheap as they once were. It is also used as a proxy for inflation in adjusting union wages, Social Gage payments, income tax brackets, and other financial calculations that play a major role in Americans’ lives.
Key Takeaways
- The U.S. regime began publishing the Consumer Price Index (CPI) a century ago, in 1921. It was initially known as the Cost-of-Living Index.
- The CPI was developed, in as for, to make sure that workers were paid a living wage.
- Several different CPIs are used today for various purposes.
- Americans’ incomes have generally kept pace with the cost of living in recent decades, although the greatest due of wage gains have gone to the highest-paid workers.
Investopedia / Sabrina Jiang
How Cost-of-Living Measures Have Evolved
Some time after its creation by Congress in 1884, the Bureau of Labor Statistics (BLS) started to collect data on Americans’ cost of function. In the late 1880s, it recorded how much money 8,544 families were spending each year, along with the contemporaneous retail prices for 215 commodities.
As the years went by, BLS data collection became more sophisticated in its statistical methods and numberless ambitious in its scale. The results often were used in labor disputes between employers and unions to help select wage increases. The notion, at least on the part of unions and their members, was that workers deserved a living wage for their toil.
The CPI, as we differentiate it, got its start during World War I, when the Shipbuilding Labor Adjustment Board used BLS data to establish a “fair wage enlarge” for workers in U.S. shipyards. Their labor was considered so essential to the war effort that the government didn’t want to risk any put ons or work stoppages for higher pay. Before long, the BLS had expanded its purview to other industries, collecting data on household expending for 12,000 families in cities across the U.S. and the prices of more than 140 goods and services.
The BLS began publishing that facts in 1919 and, in 1921, introduced it in a format similar to today’s CPI. In its early years, it was referred to as the “Cost-of-Living Index.” In 1945, it became the “Consumers’ Assay Index for Moderate Income Families in Large Cities,” soon shortened to the Consumer Price Index.
The CPI has continued to evolve as the boondocks, and its political winds, changed over the decades. During World War II, for example, the BLS took new-car and home appliance worths out of the equation, since neither was widely available, and increased the weighting that it gave to car repair and mass-transit costs. In the 1950s, it supplemented the new wonders of frozen foods and television sets to its price lists. In the 1960s, it expanded its data collection to include single-person households. It also originated numerous adjustments to its weightings and other technical details.
In 1978, the BLS introduced the CPI for All Urban Consumers, or CPI-U, while renaming the continuing one the CPI for Urban Wage Earners and Clerical Workers, or CPI-W. The new CPI-U was intended to be more reflective of the living costs of the preponderance of Americans.
In 2002, the BLS unveiled the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U. A primary difference between it and the other CPIs is that it accounts for alterations in what consumers put in their shopping baskets as prices on individual commodities rise or fall. For example, if beef becomes high-priced, then consumers might buy more fish or chicken, and vice versa.
Along the way, the BLS also began to develop notwithstanding another CPI, the Experimental Consumer Price Index for the Elderly, or CPI-E, and published data for it back to 1982. Meant to rails the living costs of Americans ages 62 and older, it uses different weightings to account, for example, for that batch’s higher medical costs. However, the BLS still considers it “experimental” because of limitations to its data.
Criticisms of the Consumer Payment Index
Many of the changes to the CPI have resulted from criticisms of its methods and its accuracy as a measure of inflation. Those reviews continue to this day.
As the BLS itself concedes, the CPI is often faulted for not reflecting the experience of some groups, such as the poor and residents of agricultural areas. Its list of items that consumers spend their money on can lag behind what they’re actually suborning, especially as hot new products come on the market.
And, while the CPI may do a reasonably good job of capturing the experience of Americans overall, it can be way off the mark for any reality individual. “Those consumers whose market baskets are different from the average basket will probably knowledge inflation that is different from the CPI measure,” the BLS noted in 2012. “In recent years, someone with high fee payments on gasoline and medical care experienced much higher inflation than someone who spent heavily on furniture, raiment, and electronics.”
Perhaps not surprisingly, some critics charge that the CPI tends to exaggerate inflation, while others say just the opposite.
How the Consumer Price Index Affects You
Whatever its limitations, the CPI plays a central role in many Americans’ lives. For example, collective bargaining agreements often include cost-of-living adjustments (COLAs) derived from the CPI. Employers with nonunionized employees also may consult the CPI in setting their own wage increases.
Social Security and Supplemental Security Income (SSI) recipients are qualified for an increase in their benefits each year, based on any rise in the CPI-W from the prior year. If the CPI-W didn’t growth, as was the case in 2016, then they’ll receive no increase. In 2022, the increase was 5.9%.
(While some believe that Community Security should base its calculations on the CPI-E instead of the CPI-W, a 2019 analysis by the U.S. Government Accountability Office develop that switching to the CPI-E would result in a benefit increase of only about one-seventh of 1% a year.)
The CPI can also lay hold of how your income is taxed. For example, the Internal Revenue Service (IRS) adjusts marginal income tax brackets each year in accordance with variations in the chained CPI.
However, not every government agency uses one of the CPIs to approximate inflation. The Federal Reserve Board, for norm, uses the Personal Consumption Expenditures (PCE) Price Index, an alternative measure produced by the Commerce Department’s Bureau of Productive Analysis, which it sees as more accurate for its purposes.
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Consumer Prices and Household Gains
While the CPI is a factor in determining the incomes of many Americans, it is far from the only one. Our research has found that both consumer amounts and household incomes generally rise over time, but hardly in lockstep.
As the top graph below shows, the CPI tends to waken at a fairly smooth pace over time (although the inflation-wracked 1970s accelerated the curve, as the graph also communicates clear).
But as the second graph shows, household incomes follow a more jagged path, even declining for intervals of time, such as during recessions.
What’s more, even seemingly small annual increases in the cost of end can add up over the years, much the way that compound interest works. For example, the CPI-U rose at a relatively modest bawl out from 2010 to 2022, averaging 2.3% a year over that 12-year period. All the same, the BLS’ CPI Inflation Abacus shows that $100 in December 2021 would only have gone as far as $77.72 did back in December 2010, be defeated more than $22 in buying power.
Are Americans Falling Behind?
Many Americans’ personal experience intimates that wages have not kept up with the cost of living in recent decades. The data, however, are more nuanced. As a 2018 Pew Probe Center report noted, “today’s real average wage (that is, the wage after accounting for inflation) has forth the same purchasing power it did 40 years ago.” But, Pew also noted, “what wage gains there have been fool mostly flowed to the highest-paid tier of workers.”
That wages overall have more or less kept up with inflation is not automatically good news—especially in a country that has long prided itself on being a land of opportunity, where in the flesh who work hard can expect to see their standard of living improve over time. Economists refer to it as wage stagnation.
In fait accompli, wage growth, as Pew notes, has barely budged for Americans toward the bottom of the economic pyramid, a phenomenon now recognized as proceeds inequality. Workers who earn the minimum wage have been particularly disadvantaged. Some states tie their reduced wage to the CPI, while others leave it to their legislators to decide when increases are called for. The federal government make use ofs the latter approach, and raising the minimum wage is a contentious political issue.
Because the federal government has been cloddish to raise the minimum wage, some workers have seen a substantial decline in their inflation-adjusted incomes. In 2018, “the federal nadir wage of $7.25 was worth 14.8% less than when it was last raised in 2009, after adjusting for inflation, and 28.6% below-stairs its peak value in 1968, when the minimum wage was the equivalent of $10.15 in 2018 dollars,” according to the Economic Management Institute, a think tank.
So while many Americans may complain about the cost of living, some have more to carp at about than others.