The annual growth rate of the Experimental Consumer Price Index (CPI-E) is compared to the growth rates of the standard CPI indexes (the CPI-U and the CPI-W) in this Public Policy Institute Data Digest by Satyendra Verma. The Data Digest also examines a new index called the superlative index (C-CPI-U).
The Consumer Price Index (CPI)
The CPI measures the average change in prices over time for a fixed “basket” of goods and services. The Social Security inflation adjustments are currently based on the CPI-W (“Urban Wage Earners and Clerical Workers”). This index represents 32% of the total U.S. population—those households that derive more than half their income from clerical or hourly wage occupations. The index is a subset of the CPI-U (“All Urban” consumers).
The Experimental Consumer Price Index (CPI-E)
The Bureau of Labor Statistics has collected data from 1983 to the present on the basis of an experimental index (CPI-E) for Americans 62 and older. The index uses a "basket" of goods and services more relevant to this group, which spends more of its money on items—such as medical care— whose costs have grown more rapidly than other expenditure items.
Social Security and the CPI-E
If the Social Security benefits were to be indexed by the CPI-E instead of the CPI-W, the annual Cost of Living Allowance (COLA) adjustments would be higher. In 2004, for example, the COLA under CPI-E would have been 0.39% higher than it was under the CPI-W. There are some problems, however, with the CPI-E. These include: 1) it does not represent all Social Security recipients, since some recipients are younger than age 62; and 2) it is based on a much smaller sample than the CPI-U sample (derived from all consumers), and therefore has a higher sampling error. Thus, even though the CPI-U does not fully represent the annual price change for older Americans, it is still the most widely used and accepted current alternative among all available measures. (4 pages)