United States General Accounting Office

GAO Testimony

Before the Subcommittee on Human Resources

Committee on Government Reform and Oversight

House of Representatives

For Release on Delivery

Expected at

11:00 a.m. EDT

Wednesday

April 29, 1998

BUREAU OF LABOR

STATISTICS

Making the CPI More

Reflective of Current

Consumer Spending

Statement of

Bernard L. Ungar, Director

Government Business Operations Issues

General Government Division

GAO/T-GGD-98-115

Summary 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

The principal source of information on trends in consumer prices and

inflation in the United States is the Consumer Price Index (CPI), which is

published by the Bureau of Labor Statistics (BLS). To determine the level of

inflation in consumer prices, the CPI tracks prices for a fixed “market

basket” of goods and services that urban consumers purchase for

day-to-day living.

As requested by the Subcommittee, GAO’s testimony today addresses

certain topics related to the CPI. The first is the need for BLS to make the CPI

expenditure weights more current by updating them more frequently than

at 10-year intervals, as GAO reported in October 1997. BLS uses expenditure

weights to aggregate market basket items into the overall index number.

The preponderance of evidence GAO obtained pointed to the need for and

advantages of more frequent updates. This evidence included the (1) views

of professionals knowledgeable about the CPI, (2) practices of other

countries, (3) results of research that show that the age of expenditure

weights affects the CPI, and (4) the sizable effect more frequent updates

could have on the federal budget in comparison to the relatively small

costs associated with updates. BLS has said it agrees with GAO’s

recommendation for more frequent updates and is considering the

appropriate update frequency.

GAO also examined how well those elements of BLS’ strategic plan and

performance plan that focus on improving the CPI would meet the criteria

in the Government Performance and Results Act of 1993 and related

guidance, even though the BLS plans are not required to comply with the

statutory requirements. In examining BLS’ fiscal year 1999 performance

plan, GAO found that it was partially successful in providing a picture of

BLS’ intended performance to improve the CPI’s quality. Further, the plan

did not fully portray how BLS’ strategies and resources would help achieve

the performance goals for improving CPI quality or how BLS would ensure

that the data it uses to assess its performance are credible.

GAO also reviewed the linkage between the goals in BLS’ strategic plan

relating to improving the CPI and the 1996 Boskin commission

recommendations to BLS. GAO found linkages between some, but not all, of

the commission’s recommendations and the plan’s performance goals and

indicators. Neither BLS’ strategic plan nor its fiscal year 1999 performance

plan discusses such linkages or the lack of them. BLS and the Department

of Labor question the usefulness of discussing recommendations

contained in particular reports, such as the Boskin commission report, in

long-range planning documents. However, GAO believes such a discussion

Page 1 GAO/T-GGD-98-115
Summary 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

would enhance the plans’ usefulness and credibility to CPI stakeholders

given the great interest shown in the Boskin commission

recommendations by Congress and others.

Page 2 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to assist the Subcommittee in its

deliberations with the Bureau of Labor Statistics (BLS) on the Consumer

Price Index (CPI), one of the most important indexes produced by the

federal government. The Subcommittee has asked us to address several

topics related to making the CPI more reflective of current consumer

spending.

According to BLS, the CPI is the principal source of information on trends in

consumer prices and inflation in the United States and affects nearly all

Americans because of the many ways it is used. For example, it is often

used to increase wages and benefit payments to adjust for the erosion of

consumer purchasing power due to inflation. In 1997, the federal

government adjusted the benefits of 43.6 million Social Security

beneficiaries and 21.4 million food stamp recipients because of the growth

in consumer prices as reported by the CPI. In addition, federal tax brackets

are adjusted automatically by the CPI to prevent inflation-induced

increases in tax rates.

To gauge the level of inflation in consumer prices, the CPI tracks prices for

a fixed “market basket” of goods and services that urban consumers

purchase. These purchases are for food, clothing, shelter, fuels,

transportation, medical care, entertainment, and other goods and services

that people buy for day-to-day living. Only those expenditures made by

consumers (not including businesses) are captured in the CPI.

Congress has been concerned with whether the CPI accurately reflects

consumer spending, and the Senate several years ago chartered the

Advisory Commission to Study the Consumer Price Index (also referred to

as the Boskin commission). The commission concluded in its

December 1996 report that the fixed market basket CPI (1) becomes less

and less representative of consumer spending over time as consumers

respond to price changes and new consumer choices and (2) overstates

the true cost of living.1

 The commission estimated the size of the

overstatement for the next few years to be 1.1 percentage points per year,

and it made recommendations to BLS and to the President and Congress.

Within the community of professional economists and statisticians, the

commission’s report is supported by some and opposed by others.

1

The Boskin commission’s December 1996 report to the Senate Committee on Finance was titled

Toward a More Accurate Measure of the Cost of Living.

Page 3 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

As requested, I will discuss three topics today: (1) the need for and

advantages of more frequent updating of the CPI expenditure weights,

(2) the nature of the work we are currently doing with regard to the CPI,

and (3) BLS’ coverage of CPI improvement efforts in its strategic plan and

fiscal year 1999 annual performance plan.

Need for and

Advantages of More

Frequent Updating of

the CPI Expenditure

Weights

In an October 1997 report, we concluded that the CPI expenditure weights

should be updated more frequently than at the current rate of

approximately every 10 years to make the fixed market basket CPI more

timely in its representation of consumer expenditures.2

 The CPI is based on

a fixed market basket of goods and services purchased by urban

consumers. These items are assigned weights by BLS to give proportionate

emphasis for price changes of one item in relation to other items in the CPI.

The weights used to aggregate the items into the overall index number for

the CPI are based on the Consumer Expenditure Survey, which BLS uses to

determine what goods and services consumers are buying. Historically, BLS

has changed the expenditure weights only when making major revisions to

the CPI. Since 1940, that has occurred about every 10 years.

My comments on the need for and advantages of more frequent updating

of the CPI expenditure weights are based largely on our October report and

will provide information on (1) the views of individuals knowledgeable

about the CPI on the issue of updating the expenditure weights between

major revisions to the CPI, (2) the updating practices of other industrial

countries, (3) the cost to update the expenditure weights, (4) the possible

effect on the federal budget of more frequent updates, and (5) BLS’

response to our recommendation that it should update the expenditure

weights more frequently.

More Frequent Updating

Deemed Desirable by

Individuals Knowledgeable

About the CPI

We spoke with 10 individuals who were former officials of BLS or who had

otherwise studied the CPI, and they were unanimous in stating that 10

years between updates of the expenditure weights was too long. However,

there was less agreement among the individuals on exactly how often the

updating should occur. Five, including the chairman and three members of

the Boskin commission, said more frequent updating of expenditure

weights was less important than other ways of making the CPI more

reflective of current consumer spending. Dr. Boskin told us that if there

were no changes in existing products or no new products in the economy,

2

Consumer Price Index: More Frequent Updating of Market Basket Expenditure Weights Is Needed

(GAO/GGD/OCE-98-2, Oct. 9, 1997).

Page 4 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

then updating the expenditure weights would be the only step that BLS

would need to take. However, since the economy does change, with new

products being developed and product improvements occurring

constantly, he believed more frequent updating was only one step among a

number that should be taken to improve the CPI.

Practices of Other

Industrial Countries

We also obtained information on the updating practices in Japan, Italy,

Germany, France, Canada, and the United Kingdom, which along with the

United States have made up the Group of Seven (G-7) countries.3

 All of

them track consumer prices through a market basket of goods and

services and weight the prices of the items in the market basket.

According to information provided by BLS and contained in international

publications, all six update their consumer price indexes more often than

the United States. Two updated the weights of their consumer price

indexes annually, and the other 4 did so approximately every 5 years.

However, BLS officials noted that the updates by the six countries do not

comprise the same level of detail as used for the CPI; for example, some do

not use consumer expenditure surveys as does the United States.

Cost to Update the

Expenditure Weights Is

Estimated to Be Relatively

Small

The estimated cost of updating the expenditure weights is relatively small

in comparison to the cost of major revisions. To estimate the cost for our

October 1997 report, we assumed that an update to the expenditure

weights would have occurred in 1992 and would occur in 2003, which is 5

years after major revisions to the CPI market basket. On the basis of data

supplied by BLS, the estimated cost to have updated the weights in 1992

would have been $2.4 million spread over 3 years. According to BLS, the

estimated cost to update the expenditure weights in 2003 would be

$3.1 million over a 3-year period. In comparison, BLS reported that the

major CPI revision in 1987 cost $47 million over 5 years and, at the time of

our report, expected the cost of the 1998 major revision to be about

$66 million over 6 years. BLS explained this difference in cost by pointing

out that an update of the expenditure weights would exclude many

activities that are included in major CPI revisions.

More Frequent Updates

Could Affect the Federal

Budget

Because federal tax brackets and federal payments, such as those to Social

Security beneficiaries, are adjusted for inflation, a CPI that more accurately

measures inflation could affect the federal budget. BLS estimated the

annual range of change in the CPI, if the expenditure weights were updated

3

The G-7 countries have met to coordinate economic and monetary policy.

Page 5 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

on a 5-year cycle, from 0 (zero)—no change—to a decrease of 0.2

percentage point. We asked the Congressional Budget Office (CBO) to use

the midpoint of BLS’ range (a decrease of 0.1 percentage point) to estimate

the effect on the federal budget. CBO estimated that, assuming no other

changes in policy or economic assumptions, if updating the weights in

2003 (5 years after the 1998 major revision) reduced CPI growth by 0.1

percentage point annually, the projected budget surplus would be

increased by a cumulative total of $16.5 billion over the 5-year period of

2004 through 2008.4

Most of the impact of such a reduction in the CPI would be on federal

outlays—such as reduced payments to Social Security beneficiaries, which

account for most of the outlays—and most of the impact would occur in

the later years. For example, according to estimates by SSA actuaries

using an annual 0.1 percentage point reduction in CPI growth, the average

monthly benefit check for retired workers in 2004 would be reduced by

$0.91, from $939.94 to $939.03; by the fifth year (2008), the average

monthly check would be reduced by $4.86, from $1,065.98 to $1,061.12.

BLS’ Response to Our

October 1997

Recommendation

In our October 1997 report, we recommended that as long as a fixed

market basket CPI is published, the Commissioner of BLS should update the

expenditure weights of the CPI’s market basket of goods and services more

frequently than every 10 years. BLS plans to publish, starting in 2002, a CPI

index based on the concept of superlative index formulas, which would

enable that index to be more current than the fixed market basket index in

reflecting consumer spending. The Boskin commission recommended use

of a superlative index formula to construct the CPI, although BLS believes

the recommendation did not specify how a true superlative index might be

constructed. Moreover, BLS does not view the superlative index as a

replacement for the fixed market basket index, and said it would continue

to publish the fixed market basket CPI.

In commenting on GAO’s recommendation, the BLS Commissioner said she

supports more frequent updates of the expenditure weights. However, she

said neither economic theory nor empirical evidence demonstrates the

superiority of any particular update interval. This has been the principal

reason why BLS has not updated the expenditure weights between major

revisions to the CPI. Other reasons cited by BLS included difficulties in

4

In our October 1997 report, we gave a 4-year CBO projection of $10.8 billion, which was based on a

March 1997 baseline. CBO used a March 1998 baseline to make the 5-year projection.

Page 6 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

obtaining funds to bring about change to the CPI and concern with what

would be the best approach to improve the CPI.

Although theoretical guidance is not available on all facets of updating

expenditure weights, such as exactly how often updates should occur, the

preponderance of the data we reviewed supported the need for updating

expenditure weights more frequently than approximately every 10 years.

Recognizing that the data are not perfect and do not isolate the effects of

using outdated expenditure weights, comparisons of price indexes with

old and new weights that go back to those made for the first revision in

1940 indicate that price indexes computed with more current weights

were always different from indexes computed with older weights. These

comparisons and more recent research conducted by BLS tend to show

lower rates of inflation with indexes using newer weights.

Since last fall when we received the Commissioner’s comments, the

Commissioner has told this Subcommittee that BLS is committed to more

frequent updating of the weights used to calculate the CPI. In March 1998,

the Commissioner said that, although BLS had not yet decided on the

optimal frequency of weight updates, it was clear that a reduction in the

current (approximately 10-year) period between updatings was warranted.

Current GAO Work on

the CPI

At the request of the Ranking Minority Member of the Senate Committee

on Governmental Affairs, the Honorable John Glenn, we are gathering

information from BLS related to the quality adjustment issues raised by the

Boskin commission. To better inform policymakers and other

commentators on this issue, we have been asked to describe the policies,

procedures, and practices that BLS currently uses to account for

differences between a new item and the item it replaced. This replacement

process is necessary when an item is no longer available for BLS to price.

Within this process, BLS determines if the new item is comparable to (i.e.,

the same as) the old item that disappeared. We are in the process of

collecting information to describe what BLS does when the two items are

not comparable. We anticipate issuing our report early next year.

Page 7 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

BLS’ Coverage of CPI

Improvement Efforts

in Its Strategic Plan

and 1999 Performance

Plan

For this testimony, you asked us to review certain planning documents BLS

prepared for improving the accuracy of the CPI. The model for such

planning documents is the Government Performance and Results Act of

1993, also referred to as the Results Act. The Act seeks to improve the

efficiency, effectiveness, and accountability of federal programs by

establishing a system to set goals for programs based on their intended

purposes, measure the performance of those programs, and use

performance information to improve results. As you know, if successfully

implemented, the Results Act will help agencies focus on how to improve

their programs’ performance in achieving desired results.

The approach to performance-based management and accountability

envisioned by the Results Act is a dynamic and iterative process in which

one stage builds on and reinforces the progress made at earlier stages.

Under the Results Act, agencies first were to prepare long-term strategic

plans that set the general direction for their efforts. The strategic plans

agencies prepared were to be the starting point for agencies to set

performance goals for programs in their annual performance plans.

The Results Act does not require component agencies of departments,

such as BLS, to prepare strategic and annual performance plans. However,

some component agencies have prepared those plans as BLS has done at

the direction of the Department of Labor. Although the strategic and

annual performance plans prepared by component agencies such as BLS

are not required to comply with the requirements of the Results Act, these

component agencies may use the statutory requirements as guidance in

developing their strategic and performance plans. In addition, the

Department of Labor instructed BLS to follow OMB’s guidance to federal

agencies for implementing the Results Act in preparing its annual

performance plan. Moreover, Labor included the entire BLS strategic plan

as part of the department’s strategic plan.

BLS’ strategic plan includes an agency strategic goal to “improve accuracy,

efficiency, and relevancy of our economic measures and program outputs

through increased application of state-of-the-art statistical techniques,

economic concepts, technology, and management processes.” The CPI is

one of these economic measures, and one of the strategic plan’s objectives

is to improve the quality of the CPI. The strategic plan provides

performance goals and performance indicators for this objective (see app.

I for those for fiscal year 1999).

Page 8 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

BLS’ fiscal year 1999 annual performance plan lists the same agency

performance goals and performance indicators for the CPI that are listed

for fiscal year 1999 in BLS’ strategic plan. Thus, the performance goals and

indicators in the 1999 annual performance plan are linked to those in the

strategic plan.

Observations on BLS’

Fiscal Year 1999 Annual

Performance Plan

As you requested, we reviewed BLS’ performance plan for fiscal year 1999,

focusing on the plan’s elements that related to the objective of improving

the quality of the CPI. To do this review, we used criteria in the Results Act,

Office of Management and Budget’s (OMB) guidance on developing the

plans (Circular A-11, part 2), our February 1998 guidance for congressional

review of the plans,5

 our April 1998 guidance for assessing agencies annual

performance plans,6

 and the December 17, 1997, letter to OMB Director

Raines from eight congressional leaders that includes suggestions for how

to make the performance plans more useful. For purposes of our analysis,

we collapsed the six requirements for annual performance plans in the

Results Act and the related guidance into three core questions: (1) To what

extent does the agency’s performance plan provide a clear picture of

intended performance across the agency? (2) How well does the

performance plan discuss the strategies and resources the agency will use

to achieve its performance goals? (3) To what extent does the agency’s

performance plan provide confidence that its performance information

will be credible?

Overall, BLS’ fiscal year 1999 performance plan would partially meet the

criteria in the Results Act and related guidance, although, as stated

previously, we recognize that the plan was not required to comply with the

statutory requirements. Considering that this is the first Results Act

performance plan that BLS has produced, the plan contains a great deal of

useful information to inform Congress and others about how BLS intends to

accomplish its mission. We expect that as BLS gains experience, future

performance plans will build upon this initial effort and become

increasingly more useful to Congress and the public. Specifically with

respect to the CPI, BLS’ fiscal year 1999 performance plan provides a partial

picture of BLS’ intended performance relative to its goals aimed at

improving the quality of the CPI. Further, the plan does not fully portray

how BLS’ strategies and resources will help achieve BLS’ performance goals

5

Agencies’ Annual Performance Plans Under the Results Act: An Assessment Guide to Facilitate

Congressional Decisionmaking (GAO/GGD/AIMD 10.1.18, Feb. 1998).

6

The Results Act: An Evaluator’s Guide to Assessing Agency Annual Performance Plans

(GAO/GGD-10.1.20, April 1998).

Page 9 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

for improving CPI quality or how BLS will ensure that information it uses to

assess actual performance against CPI improvement goals is accurate,

complete, and consistent.

Under the criteria in the Results Act and related guidance, agency annual

performance plans are to contain goals for each of the program activities

identified in the agency’s budget and should express them in objective,

quantifiable, and measurable form to allow comparison between actual

and planned performance. Agencies can use their discretion in

determining their performance goals. Agency plans should also contain

indicators to be used in measuring or assessing the relevant outputs,

service levels, and outcomes of each program activity. In our view, BLS’

performance goals associated with improving the quality of the CPI, which

are shown in appendix I, are linked to its budget and are objective and

measurable. As BLS notes, the goals are generally expressed as significant

milestones expected to be accomplished during the given year.

Because of the way in which the goals are expressed, BLS’ performance

indicators for accomplishing the milestones are activity or output oriented

rather than outcome oriented. BLS notes this in its plan and says that, over

time, it will show how its indicators relate to desired outcomes, such as

improving the accuracy of the CPI. The use of output-oriented goals is

allowed under OMB’s guidance for implementing the Results Act. The

guidance notes that, although outcomes should be used whenever

possible, outputs may be used for several reasons, including when

outcomes may not be scheduled for achievement in the fiscal year covered

by the plan. However, it appears to us that the goals and indicators BLS

cites in its performance plan are, for the most part, changes to the CPI that

BLS expects to complete in fiscal year 1999 that are aimed at improving the

CPI’s quality. Thus, it would appear that BLS’ performance plan would be

more fully responsive to OMB’s guidance if the goals or indicators included

an outcome dimension to reflect the results of BLS’ activities. Such

outcome-oriented goals or indicators could relate to improvements in the

accuracy, efficiency, or relevancy of the CPI.

Furthermore, BLS’ goals and indicators could be more specific and

quantifiable to enable better stakeholder comparisons of actual results

with established goals. For example, BLS’ indicator for its performance

goal to expand the Consumer Expenditure Survey (CE) sample is: “Begin

data collection and processing of larger sample.” In its justification for its

submission for the President’s budget, BLS requested resources to expand

the sample size of the CE by approximately 50 percent. The performance

Page 10 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

goal as set forth in the annual plan is not as specific, however, and does

not inform the reader that BLS plans to expand the CE by 50 percent. Also,

if the baseline measure cited the prior CE sample size, which it does not

do, then CPI stakeholders could determine whether BLS has achieved its

goal to expand the CE by 50 percent when it reports its results. We also

note that none of the performance goals to improve the quality of the CPI

provide baseline measures.

Under the criteria in the Results Act and related guidance, annual

performance plans should briefly describe the agencies’ strategies and the

human, capital, financial, and other resources they will use to achieve

their performance goals. BLS’ performance plan indicates that

state-of-the-art statistical techniques, economic concepts, technology, and

management processes will be applied to achieve its performance goals

aimed at improving the quality of the CPI. It also mentions the operational

processes and technological advances that BLS is making. Further, the plan

points out that BLS is requesting additional funding for fiscal year 1999 of

about $9.1 million and 36 full-time equivalent employees to undertake

initiatives needed to improve the CPI’s timeliness and accuracy.

However, BLS’ performance plan does not fully portray how BLS’ strategies

and resources will help achieve the BLS performance goals. We believe

such information would better enable CPI stakeholders to see how BLS

intends to achieve each goal and the associated resources it will need to

do so. BLS’ performance plan does link each performance goal aimed at

improving the quality of the CPI with BLS’ program activities listed in the

President’s budget and shows the increased amount of funding and

full-time equivalent staff associated with achieving all such goals.

However, BLS’ performance plan does not show the funding level

associated with the individual program activities identified in its

performance plan, as provided in OMB’s Results Act guidance.

Finally, under the criteria in the Results Act and related guidance, agencies

should describe the means to be used to verify and validate performance

data. According to this guidance, the means used should be credible and

specific to ensure that performance information is sufficiently complete,

accurate, and consistent. BLS’ performance plan for fiscal year 1999 does

not specify the procedures BLS intends to use to verify and validate the

information related to its performance goals for improving CPI quality.

However, in its performance plan for fiscal year 1999, BLS states that over

time it will validate its indicators by showing how they relate to desired

outcomes, such as improving accuracy. In addition, we believe it would be

Page 11 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

more useful to CPI stakeholders if the plan included information to

demonstrate the credibility of the data BLS will use to measure its

performance.

Observations on Linkage

Between Boskin

Commission’s

Recommendations and

BLS’ CPI Performance

Goals and Indicators

As you requested, we also compared the extent to which certain BLS

performance goals and performance indicators contained in its strategic

plan that relate to improving the CPI reflected the recommendations made

in December 1996 by the Boskin commission.

Overall, we found linkages between BLS’ performance goals and indicators

relating to improving the CPI and three Boskin commission

recommendations (see app. II). The commission referred to these specific

recommendations as short-run recommendations—that is, those that the

commission thought could be implemented immediately, with little

additional resources or no data collection initiatives.7

 These

recommendations were to develop a monthly index that would adopt a

superlative index formula at the upper level of aggregation in the index, to

be called the CPI, and replace the current fixed market basket CPI;

8

 use a

geometric means formula at the lower level of aggregation in the CPI;

9

 and

expand the use of regression techniques. We based the linkages on

concepts that were identified in the recommendations and the

performance goals and indicators. For example, we made a linkage

between the Boskin recommendation that said BLS should move to a

geometric means at the elementary aggregates level and the performance

goal and related indicators that mentioned geometric means.

BLS’ performance goals and indicators that we linked did not always

address the full scope of the Boskin recommendations. For example, BLS

has identified a series of performance indicators for the performance goal

“develop alternative measures of change in living costs” that would result

in published superlative indexes by fiscal year 2002, which we linked to

the third Boskin commission recommendation. We note that the plan’s

discussion of this performance goal and its indicators does not address

several aspects of that Boskin recommendation, such as abandoning the

7

The Boskin commission placed its recommendations to BLS into three categories: short run,

intermediate run, and longer run. We placed two unclassified recommendations into a general/overall

category.

8

The Boskin commission referred in its recommendation to a particular form of superlative index but

BLS does not agree that the form referred to should be characterized as a superlative index.

9

On April 16, 1998, BLS announced that, beginning in January 1999, it will use a geometric mean

formula to aggregate the lower-level categories for approximately 61 percent of total consumer

spending represented in the CPI.

Page 12 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

current fixed market basket CPI. In addition, this performance goal and

related indicators indirectly relate to the two overall Boskin commission

recommendations for BLS to establish a cost-of-living index as its objective

and to develop and publish a monthly index and an annual index. If the

strategic plan provided more detailed information, it would help inform

stakeholders about the frequency (monthly and/or annually) with which

the planned alternative index measures will be published and would allow

CPI stakeholders to make appropriate linkages to the Boskin commission’s

recommendations.

We found no linkage between the performance goals and indicators and

the eight intermediate and longer-run recommendations of the Boskin

commission. To determine BLS’ views on these recommendations, we

relied upon a written statement BLS sent to the Chairman of the Joint

Economic Committee in June 1997.10 BLS has provided Congress with its

views on the Boskin commission report on several occasions; for example,

in addition to the June 1997 statement, it also provided testimony to the

Senate Budget Committee in January 1997 and to the House Budget

Committee in March 1997. BLS informed us that any Boskin commission

recommendation for which linkages cannot be identified in its strategic

plan were those that either restate current BLS/CPI policy, are presently in

development, or have been explicitly rejected by BLS. Further, BLS said that

it had initiated work related to many of the areas covered by the Boskin

commission’s recommendations prior to the issuance of the commission’s

report.

BLS told us that both it and the Department of Labor question the

usefulness of discussing recommendations contained in particular reports,

such as the Boskin commission report, in long-range planning documents,

including BLS’ strategic plan and fiscal year 1999 annual performance plan.

However, given the high degree of interest that Members of Congress, the

Federal Reserve, and others who are concerned about the accuracy of the

CPI have shown in the Boskin commission’s report and recommendations,

we believe that a discussion of the relationship of the goals in BLS’

performance plan for fiscal year 2000 to the Boskin commission

recommendations, or an explanation of the absence of such relationship,

would add to the plan’s credibility and usefulness to CPI stakeholders.

10BLS, “Measurement Issues in the Consumer Price Index,” paper prepared in response to a letter from

Representative Jim Saxton, Chairman of the Joint Economic Committee, June 1997.

Page 13 GAO/T-GGD-98-115
Statement 

Burea of Labor Statistics: Making the CPI

More Reflective of Current Consumer

Spending

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions that you or other Members of the

Subcommittee may have.

Page 14 GAO/T-GGD-98-115
Page 15 GAO/T-GGD-98-115
Appendix I 

CPI-Related Objectives, Performance Goals,

and Fiscal Year 1999 Performance

Indicators

Table I.1: CPI-Related Objectives,

Performance Goals, and Fiscal Year

1999 Performance Indicators for BLS’

Strategic Goal to Improve Accuracy,

Efficiency, and Relevancy of Economic

Measures

Performance goal Fiscal year 1999 performance indicator

Objective: Improve the quality of the Consumer Price Index (CPI)

Improve the CPI sample design and

estimation methodology used for CPI rent

and Owner’s Equivalent (REQ) estimates.

Use new sample design and estimation

methodology for rent and REQ in

published CPI.

Update the CPI market basket’s Housing

sample to reflect current demographic and

geographic population characteristics.

Updated Housing sample used in

published CPI.

Update the CPI market basket’s

Commodities and Services sample to reflect

current geographic population and

expenditure patterns of all goods and

services.

Published CPI includes

• certain previously unpriced services,

• prices collected for new goods and

services entering the market place,

• quality adjustment for certain goods and

services based on supplemental sample of

prices and characteristics, and

• new item samples based on Telephone

Point of Purchase Survey.

Develop alternative measures of change in

living costs.

Produce updated superlative indexes in an

enhanced research environment utilizing

1997 Consumer Expenditure Survey data.

Expand the Consumer Expenditure Survey

sample.

Begin data collection and processing of

larger sample.

Test an experimental CPI using geometric

means.

Incorporate changes into the official CPI.

Objective: Improve service sector coverage in major BLS programs: Consumer

Price Index, Producer Price Index, International Price Program, and Productivity.

Increase the coverage of service industries’

price and productivity indexes.

Published CPI includes certain previously

unpriced services.

Source: BLS’ strategic plan and fiscal year 1999 performance plan.

Page 16 GAO/T-GGD-98-115
Appendix II 

Our Analysis of the Linkage Between the

Boskin Commission’s Recommendations

and BLS’ Strategic Plan for Fiscal Years 1998

Through 2002

Performance indicator, by the end of fiscal year Boskin commission’s

recommendation BLS’ performance goal 1998 1999 2002a

General/overall

1. BLS should establish a

cost-of-living index as its

objective in measuring

consumer prices.

b b b b

2. BLS should develop

and publish two

indexes—one published

monthly and the other

published and updated

annually and revised

historically.

b b b b

Short run—recommendations that the commission thought could be implemented immediately, with little additional resources or new

data collection initiatives.

3. The timely monthly

index should continue to

be called the CPI and

should move toward a

cost-of-living concept by

adopting a “superlative”

index formula to account

for changing market

baskets, abandoning the

pretense of sustaining the

Laspeyres formula.

Develop alternative

measures of change in

living costs.

Begin research on

design issues.

Produce updated

superlative indexes

utilizing 1996 Consumer

Expenditure Survey data.

Produce updated

superlative indexes in an

enhanced research

environment utilizing

1997 Consumer

Expenditure Survey data.

Publish production

quality superlative

indexes to supplement

the official CPI.

Expand the Consumer

Expenditure Survey

sample.c

Prepare for sampling;

hire and train

interviewers.

Begin data collection

and processing of larger

sample.

d

4. BLS should move to

geometric means at the

elementary aggregates

level.

Test an experimental CPI

using geometric means.

Determine which CPI

basic indexes are best

calculated with the

geometric means formula.

Incorporate changes into

the official CPI.

d

BLS should greatly

expand the use of hedonic

regression techniques to

deal with quality change.e

Update the CPI market

basket’s Commodities

and Services sample to

reflect current

geographic population

and expenditure patterns

of all goods and services.

f Prices collected for new

goods and services

entering the market

place.

Quality adjustment for

certain goods and

services based on

supplemental sample of

prices and

characteristics.

d

Intermediate run—reforms that the commission said are feasible within the current state-of-the-art but that would require new data

collection, reorganization of activities, and changes in the detail of the various sub-indexes produced by the CPI.

(continued)

Page 17 GAO/T-GGD-98-115
Appendix II 

Our Analysis of the Linkage Between the

Boskin Commission’s Recommendations

and BLS’ Strategic Plan for Fiscal Years 1998

Through 2002

Performance indicator, by the end of fiscal year Boskin commission’s

recommendation BLS’ performance goal 1998 1999 2002a

5. BLS should study the

behavior of the individual

components of the index

to ascertain which

components provide most

information on the future

longer-term movements in

the index and which items

have fluctuations that are

largely unrelated to the

total and emphasize the

former in its data collection

activities.

f f f f

6. BLS should change the

CPI sampling procedures

to de-emphasize

geography, starting first

with sampling the universe

of commodities to be

priced and then deciding,

commodity by commodity,

what is the most efficient

way to collect a

representative sample of

prices from which outlets,

and only later turn to

geographically clustered

samples for the economy

of data collection.

f f f f

7. BLS should investigate

the impact of

classification, that is item

group definition, on the

price indexes, to improve

the ability of the index to

fully capture item

substitution.

f f f f

(continued)

Page 18 GAO/T-GGD-98-115
Appendix II 

Our Analysis of the Linkage Between the

Boskin Commission’s Recommendations

and BLS’ Strategic Plan for Fiscal Years 1998

Through 2002

Performance indicator, by the end of fiscal year Boskin commission’s

recommendation BLS’ performance goal 1998 1999 2002a

8. There are a number of

additional conceptual

issues that require

attention. The price of

durables, such as cars,

should be converted to a

price of annual services,

along the same lines as

the current treatment of

the price of

owner-occupied housing.

Also, the treatment of

“insurance” should move

to an ex-ante consumer

price measure rather than

the currently used ex-post

insurance profits based

measure.

f f f f

9. BLS needs a more

permanent mechanism for

bringing outside

information, expertise, and

research results to it.

f f f f

Longer run—recommendations the commission identified as emphasizing topics and areas that need additional research and

attention.

10. BLS should develop a

research program to look

beyond its current “market

basket” framework for the

CPI.

f f f f

11. BLS should investigate

the ramifications of the

embedded assumption of

price equilibrium.

f f f f

12. BLS should develop a

number of new data

collection initiatives to

make some progress

along these lines.

f f f f

(Table notes on next page)

Page 19 GAO/T-GGD-98-115
Appendix II 

Our Analysis of the Linkage Between the

Boskin Commission’s Recommendations

and BLS’ Strategic Plan for Fiscal Years 1998

Through 2002

Note: The strategic plan includes additional agency performance goals and performance

indicators, such as those related to the 1998 major revision of the CPI, which are excluded from

this table because they cannot be directly linked with the stated Boskin commission

recommendations. For a detailed response by BLS to the Boskin commission’s recommendations,

see “Measurement Issues in the Consumer Price Index,” a paper prepared in response to a letter

from Representative Jim Saxton, Chairman of the Joint Economic Committee, June 1997.

aFor the agency performance goals listed, there were no performance indicators listed for fiscal

years 2000 and 2001.

bTo the extent that BLS addressed the short-run recommendations, we view these general/overall

recommendations as having an indirect linkage to BLS’ performance goals and performance

indicators.

cAs part of its fiscal year 1998 budget enhancements proposal, BLS stated that an expanded

Consumer Expenditure Survey would permit the CPI program to produce a superlative form

index. We therefore linked this goal to the third recommendation. It could also be linked to a

Boskin recommendation that was addressed to Congress—“Congress should provide the

additional resources necessary to expand the CES sample and the detail collected, to make the

POPS survey more frequent, and to acquire additional commodity detail from alternative national

sources, such as industry surveys and scanner data.”

dAccording to BLS officials, BLS expects to complete its milestones for the performance goal

before fiscal year 2002.

eThis recommendation was added to the 12 stated recommendations because, according to

commission members, “...we should have listed it as a numbered explicit recommendation in the

last section, since at least one eminent scholar in the field interpreted its exclusion as a

downweighting of its significance. We meant the opposite—it was so obvious (to us) as not to

even require repetition as an explicit formal recommendation.” (See Michael J. Boskin et al.,

“Consumer Prices, the Consumer Price Index, and the Cost of Living,” Journal of Economic

Perspectives, Vol. 12, No. 1, Winter 1998, ft. no. 11, p. 14.) We also classified it among the

short-run recommendations since BLS has incorporated it in its strategic plan for fiscal year 1999.

f

No linkage was found between the Boskin recommendation and BLS’ performance goals and

indicators.

Source: BLS and Toward a More Accurate Measure of the Cost of Living, Final Report to the

Senate Finance Committee from the Advisory Commission to Study the Consumer Price Index,

December 4, 1996.

(410314) Page 20 GAO/T-GGD-98-115
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100