20 Monthly Labor Review May 2006

U.S. and European Inflation

This article introduces an experimental1

 consumer price index for the United States that

follows, to the extent possible, the methods

of the Harmonized Index of Consumer Prices (HICP),

the European Union’s (EU’s) official price index.

The U.S. HICP differs from the U.S. Consumer Price

Index (CPI) in two major respects. First, the HICP

includes the rural population in its scope. Second,

and probably more importantly, the HICP excludes

owner-occupied housing, in part because the

methods for measuring price changes for owneroccupied housing are controversial and difficult.

To construct the experimental U.S. HICP, the CPI

first was expanded to cover the entire (noninstitutional) U.S. population and then was narrowed to

remove the owner-occupied housing costs that the

HICP excludes from its scope.

Price indexes, such as the CPI, are complex

constructs that can be sensitive to decisions about

their scope, the formulas by which they are

calculated, and other factors that are under the

control of the statistical agencies that disseminate

them. Until recently, there was little standard

international practice pertaining to CPI’s, and in

making decisions on how to structure their CPI’s,

the agencies often gave a low priority to international comparability. Virtually every country has

a statistical agency that produces these indexes.

Countries use CPI’s for a variety of purposes, one

of the chief ones of which is largely internal: as a

mechanism for adjusting income payments such as

Walter Lane is Chief of

the Branch of

Consumer Prices,

Office of Prices and

Living Conditions,

Bureau of Labor

Statistics. Mary Lynn

Schmidt is an

economist in the

same office. E-mail:

Lane.Walter@bls.gov

or Schmidt.MaryLynn

@bls.gov

Walter Lane

and

Mary Lynn Schmidt

An experimental U.S. consumer price index that uses

the methods of the European Harmonized Index

of Consumer Prices (HICP) tracks that index well;

the new index also moves similarly to the trend of the U.S.

Consumer Price Index for All Urban Consumers (CPI-U)

Comparing U.S. and European

inflation: the CPI and the HICP

Social Security. For this purpose, international

differences may be of little importance.

The lack of international comparability is more

problematic, however, when CPI’s are used as

economic indicators or deflators for other series.

As economic indicators, CPI’s signify how well

monetary authorities and other policymakers are

controlling inflation. As deflators, CPI’s are used

to compute real (inflation-adjusted) versions of

other economic series, such as gross domestic

product and productivity measures. Differences

in CPI methods can make cross-country comparisons of inflation or real economic series, such

as real gross domestic product, less reliable. If,

for example, there is reason to believe that differences in methods are causing one country’s

price index to appear low relative to another’s

(that is, the index would have risen more rapidly

had the one country used the other country’s

index methods), then the first country will appear

to be doing better at controlling inflation. At the

same time, its economy will appear to be growing

faster—its real (inflation-adjusted) growth rate

will be rising faster—and so will its economy’s

productivity.

In recent years, the United States has outperformed Europe with respect to these growth

indicators. Some believe that this difference in

performance is due in part to differences between

the U.S. and European CPI’s and that the Nation’s

economic performance would appear less robust

U.S. and European Inflation
Monthly Labor Review May 2006 21

if the U.S. price index used European price index methods.

BLS experimental indexes do not support this conclusion; in

fact, for the period from December 1997 to December 2005, the

U.S. HICP has risen more slowly than the official U.S. CPI has.

In other words, the spread between the U.S. and the European

economic performance would be even greater had the United

States used an HICP. Of course, there are other differences—

see later—that could not be accounted for, and these may be

responsible for some of the apparent differences in the relative

performance of the U.S. and European economies.

The need for international standards became particularly

important in Europe as the countries on that continent joined to

form the European Union (EU),2 integrating their economies.

Having a common measure of inflation is even more critical for

the 12 EU countries3

 that use the euro, the new monetary unit. To

meet this need, Eurostat (the EU’s statistical agency) developed

the HICP, which is, by design, an internationally comparable

measure of inflation. Eurostat developed the HICP’s methods4

 in

consultation with the statistical agencies of the EU member states.

The EU requires each member and each prospective member

country to produce an HICP. (Many countries continue to

produce their old consumer price indexes for internal purposes,

such as adjusting pensions, and for historical continuity.) For

admission to the EU, prospective members must meet “convergence criteria,” including a price stability standard based on the

HICP. The European Central Bank, which regulates the euro,

uses the HICP to determine eurozone monetary policy.

An experimental CPI for the total United States

The objective in this study was to create an experimental

HICP series for the United States that could be compared with

the U.S. CPI and with the HICP’s of Europe. The U.S. CPI underwent a major revision effective with the index for January

1998, so that formed the logical starting point for the experimental series to be described.

The Consumer Price Index for All Urban Consumers (CPI-U),

the headline U.S. CPI, estimates price change for the noninstitutional urban population.5

 The CPI-U excludes the rural,

nonmetropolitan population from coverage, due largely to the

difficulty involved in sampling the remote and sparsely populated areas of the country. The European HICP estimates price

change for the entire population, urban and rural. Before an HICP

for the United States was constructed, an experimental CPI for

the total U.S. population was created.6

 Called the CPI-XT, this

index was constructed out of a previously fashioned experimental index for the rural U.S. population, the CPI-XR, which was

then combined with the CPI-U.

The CPI is calculated in two stages.7

 In simple terms, for

the first stage the universe of consumer items available to

urban households in the United States is partitioned into

8,018 discrete, exhaustive, mutually exclusive categories

called elementary aggregates.

8

 The Bureau then collects a

sample of prices and produces price indexes for most elementary aggregates. (Price indexes for the unsampled elementary

aggregates, which are not as important as the sampled ones,

are imputed.) With the CPI for January 1999, the Bureau began

using a geometric mean index formula for most elementary

aggregates.

The second stage combines the price indexes for the elementary aggregates to form higher level indexes by using the

elementary price indexes as if they were prices in an index-number

formula. This higher level formula, a variant of the Laspeyres9

index formula, also is used for the elementary aggregates to which

the geometric mean formula does not apply and was used for all

elementary aggregates prior to 1999.

The Laspeyres formula requires a weight for each elementary aggregate, as well as a price index series. The Consumer

Expenditure (CE) survey is the source of these weights. Although the survey covers the entire U.S. population, including

those living in rural areas, the CPI-U’s high-level weights use

only the expenditures of CE survey respondents living in urban areas. For the 2001–02 and 2003–04 CPI weighting periods,

the CE survey had already compiled rural expenditures, which

the CPI then processed in the same way as it does those for

the consumer urban weights.10 There is a weight for each of

the 211 item strata for the rural areas in each of the 4 Census

regions. These 211 × 4 = 844 weights were used to construct

the experimental CPI for the rural United States set forth in this

article.

Of course, an index series also was required for each rural

elementary aggregate. Unlike weights, however, index series

(estimates of price change) are not readily available for the

rural aggregates. In short, the CPI does not collect prices in

rural areas, so there are no elementary aggregates for them.

Accordingly, as a proxy for the rural elementary aggregates,

the 844 elementary aggregates for the small urban areas in

each Census Bureau region were used.11 For some item

categories, these indexes may be quite reasonable: one could

speculate that rural consumers often make their purchases in

nearby small urban areas. This argument is less persuasive,

however, for item categories such as rent and utilities.

The following tabulation compares the official CPI-U

(rebased to December 2001 = 100) with the CPI-XR and the

CPI-XT:

12

December— CPI-U CPI-XR CPI-XT

2001 ................................ 100.0 100.0 100.0

2002 ................................ 102.4 102.4 102.4

2003 ................................ 104.3 103.9 104.3

2004 ................................ 107.7 108.1 107.8

2005 ................................ 111.4 112.5 111.5

The following tabulation compares the December-toDecember percent changes of those same indexes (the entries
22 Monthly Labor Review May 2006

U.S. and European Inflation

listed are the percent changes from the previous December):

December— CPI-U CPI-XR CPI-XT

 2002 ............................. 2.4 2.4 2.4

 2003 ............................. 1.9 1.4 1.8

 2004 ............................. 3.3 4.1 3.4

 2005 ............................. 3.4 4.1 3.5

The CPI-XR is only about 11 percent of the CPI-XT and therefore

has very little effect on the CPI-XT. CPI weights are expenditure

weights, not population weights. The rural population spends

less per capita on consumer items; consequently, the rural index

has a disproportionately small influence on the total index.

The U.S. HICP

Once an index for the total U.S. population was derived, its item

coverage was adjusted to correspond to that of the European

index. Again, the major difference between the U.S. and European

indexes is in the treatment of owner-occupied housing costs, a

difficult and controversial part of any CPI. The issue can be

summarized here, though only briefly.13 Most economists agree

that a house (or any other type of housing unit) is a capital good

and not a consumer good. Thus, expenditures to purchase or

make major improvements to houses are investments and out of

the scope of a CPI. Of course, on the one hand, homes provide

the occupant with shelter, a valuable service that owner occupants

would have to pay for if they did not own their homes; on the

other hand, because they live in their homes instead of renting

them out, owner occupants are foregoing income they could

receive. To capture these countervailing ideas, the U.S. CPI uses

a “rental equivalence” approach that estimates the changes in

what owner occupants would pay to rent equivalent housing.

Some European countries use this approach in their national

CPI’s as well. Others use a variety of methods that usually include

mortgage interest and taxes.

To date, the Europeans have not been able to agree on how to

measure owner-occupied housing costs. Consequently, they

have simply ruled all owner expenses (except for minor repairs

and maintenance) entirely out of the scope of the HICP.

14 For

purposes of comparability in this article, the stratum for owners’

equivalent rent of primary residence has been removed from the

U.S. HICP, along with the part of the lodging while out of town

stratum that represents owners’ equivalent rent of secondary

residences.

15

Some other differences between European and U.S. methods are

summarized in exhibit 1.16 The U.S. CPI uses a geometric formula for

most elementary aggregates, whereas many European countries

choose an arithmetic formula, which tends to rise more rapidly. (HICP

rules allow either formula.) The U.S. CPI also may quality adjust for

changes in consumer products and may introduce new products

into the pricing samples more aggressively. The Europeans approach

some kinds of insurance differently. For example, they use a premiumsnet-of-claims-paid approach; by contrast, the U.S. CPI uses gross

premiums for household and vehicle insurance.17 Future versions of

the U.S. HICP may be able to adopt additional measures which would

allow that index to follow the European methodology more closely.

In addition, differences between American and European

societies can be important sources of differences in the movement of indexes, even when identical index methods are used.

One obvious example is that, because Americans pay for a much

larger portion of medical care expenses themselves, medical care

has a much larger importance in the U.S. indexes. By contrast,

Europeans generally receive much of their medical care through

government programs, which are out of the scope of both CPI’s

and HICP’s. Americans also pay a larger share of education

costs than Europeans do: college tuition and other education

costs have been some of the fastest-rising components of the

U.S. CPI in recent years.

U.S. inflation as measured by the U.S. HICP

Table 1 compares U.S. CPI’s and HICP’s for the period from

December 1997 through December 2005. Before 2002, a period

for which rural weights are lacking, the comparison is for the

urban population only. Starting with data for January 2002,

the comparison is for the total population.18

From December 1997 through December 2005, the experimental

U.S. HICP rose 20.8 percent. Over the same period, the experimental CPI-XT grew by 22.1 percent, slightly more than the official

CPI-U’s 21.7 percent. Thus, inflation as measured by the HICP is

lower than inflation as measured by the CPI. The index for

owners’ equivalent rent rose 26.0 percent over the period from

December 1997 to December 2004, so leaving that stratum out of

the calculation reduced the HICP’s percentage growth. Over the

same period, the index for lodging while out of town rose 20.2

percent, so reducing its CPI weight for the HICP had relatively

little effect on the difference between the two.

Table 2 uses the U.S. item classification scheme to provide

weight shares19 for the CPI-U, CPI-XR, CPI-XT, and U.S. HICP-T

for the current (since January 2004) and previous (January 2002

through December 2003) CPI weight regimes. The table, which

gives weighting information for the eight CPI major groups of

item strata and for selected smaller groups and strata, shows that

rural spending patterns are rather different from those of the

urban population. For example, the rural population devotes a

larger share of its consumer spending to transportation and a

smaller share to shelter. These differences are likely the result of

differences in overall price levels and in relative prices, as well as

in income, lifestyles, and tastes.

Table 3 classifies consumer goods and services according to

the Classification of Individual Consumption by Purpose

(COICOP) scheme, which the HICP uses. At the first level, the
Monthly Labor Review May 2006 23

Comparison of European HICP with U.S. HICP and U.S. CPI-U

 Missing information

Category European HICP CPI-U

Definition

U.S. HICP

Exhibit 1.

Measure of the average change in the

prices of goods and services available

for purchase in the economic territory of the member State for purposes of directly satisfying conMeasure of the average change over

time in the prices of consumer

items—that is, goods and services

that people buy for day-to-day

living

Measure of the average change over

time in the prices of consumer

items—that is, goods and services

that people buy for day-to-day

living

 Geographic and

 population coverage

All households in the territory

of the member State

Noninstitutional urban population

of the United States

Noninstitutional population of the

United States

Item coverage Private consumption, except

owner-occupied housing,

gambling, lotteries, and life

insurance

Private consumption, except

owner-occupied housing,

gambling, lotteries, and life

insurance

Includes owner-occupied housing

and excludes gambling, lotteries,

and life insurance

 Formula Laspeyres Laspeyres Laspeyres

Weight update

 interval

At least 5 yearly updates, annual

review

Biennial Biennial

 Elementary

aggregate formula

Weighted geometric or arithmetic

mean

Weighted geometric or arithmetic

 mean

Ratio of geometric to arithmetic

mean

Classification

Level of detail

Classification of individual

consumption by purpose

(COICOP)

COICOP (2-digit level) U.S. CPI item classification

structure

94 classes, 160 subindexes 12 classes (2-digit COICOP) 211 item strata, 38 index areas

sumers’ needs
24 Monthly Labor Review May 2006

U.S. and European Inflation

table defines 12 two-digit categories that are similar to the 8

major groups of the U.S. classification system. In this study,

these 2-digit-level index series were calculated for the experimental U.S. HICP.

Comparing U.S. and European inflation

Each European country produces its own national HICP. Eurostat

combines national HICP’s to produce HICP’s for multinational

1997 ....................................................................... 91.3 ... 92.6 ...

1998 ....................................................................... 92.8 1.6 93.7 1.2

1999 ....................................................................... 95.2 2.7 96.2 2.7

2000 ....................................................................... 98.5 3.4 99.2 3.1

2001 ....................................................................... 100.0 1.6 100.0 .8

2002 ....................................................................... 102.4 2.4 102.2 2.2

2003 ....................................................................... 104.3 1.8 104.1 1.8

2004 ....................................................................... 107.8 3.4 107.9 3.7

2005 ....................................................................... 111.5 3.5 111.9 3.8

Level Percent

change Level

Four price indexes, 1997–2005

Percent

change

Table 1.

[December 2001 = 100]

December—

CPI–U (1997–2001) and CPI–XT (2002–05) HICP–U (1997–2001) and HICP–T (2002–05)

1999–2000

 All items ........................................ 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Food and beverages ............................... 15.45 15.96 15.51 20.16 15.08 15.59 15.13 20.14

Food ...................................................... 14.43 15.17 14.51 18.86 14.09 14.86 14.17 18.86

Food at home .................................... 8.34 9.48 8.46 11.00 8.06 9.01 8.17 10.87

Food away from home ....................... 6.10 5.69 6.05 7.86 6.02 5.85 6.00 7.99

Alcoholic beverages ............................. 1.02 .80 .99 1.29 .99 .73 .96 1.28

 Housing ................................................... 40.04 34.79 39.45 21.29 41.79 36.39 41.19 21.72

Shelter .................................................. 30.64 24.37 29.94 8.93 32.38 25.31 31.59 8.95

Rent of primary residence ................ 6.13 2.62 5.73 7.45 5.98 2.73 5.62 7.48

Lodging away from home .................. 2.97 1.80 2.84 1.00 3.22 2.36 3.12 .97

Hotels and motels .......................... .79 .59 .77 1.00 .74 .66 .73 .97

Owners’ equivalent of secondary

residences .................................. 2.17 1.21 2.06 .00 2.48 1.70 2.40 .00

Household insurance ........................ .35 .46 .37 .47 .37 .48 .38 .51

Owners’ equivalent rent of primary

residence ....................................... 21.20 19.49 21.01 .00 22.81 19.74 22.47 .00

Fuels and utilities ................................. 4.38 5.40 4.49 5.84 4.64 5.58 4.75 6.32

Household furnishings and operations... 5.02 5.02 5.02 6.53 4.77 5.51 4.85 6.46

Apparel .................................................... 4.82 4.24 4.75 6.17 4.32 3.87 4.27 5.68

Transportation ......................................... 17.77 21.33 18.17 23.62 17.32 21.50 17.78 23.67

Private transportation .......................... 16.52 20.59 16.98 22.07 16.21 20.89 16.73 22.27

New and used motor vehicles ........... 8.84 10.99 9.08 11.80 8.69 11.30 8.98 11.95

Motor fuel .......................................... 3.18 4.48 3.33 4.33 3.16 4.53 3.31 4.41

Public transportation ............................ 1.25 .73 1.19 1.55 1.11 .60 1.05 1.40

Medical care ............................................ 5.56 7.41 5.77 7.50 5.78 7.97 6.03 8.03

Recreation ............................................... 6.12 6.68 6.19 8.05 5.98 5.98 5.98 7.96

Education and communication ................ 6.07 5.18 5.97 7.76 6.00 5.01 5.89 7.84

Education ............................................. 2.55 1.50 2.43 3.16 2.56 1.42 2.43 3.23

Communication ..................................... 3.52 3.68 3.54 4.60 3.44 3.60 3.46 4.61

 Other goods and services ..................... 4.16 4.40 4.19 5.45 3.73 3.68 3.73 4.96

Table 2. Biennial weights (relative importances) for the U.S. indexes (CPI–U, CPI-XR, CPI-XT, and HICP-T) for 1999–2000 and

2001–021

Group

CPI–U CPI-XR CPI-XT U.S. HICP-T2

2001–02

CPI–U CPI-XR CPI-XT U.S.HICP-T2

 1 The CPI weights are based on biennial periods: the 2002–03 weights use

1999–2000 expenditures, and the 2004–05 weights use 2001–02 expenditures.

Relative importances are expenditures of each item as a percent of total

expenditures.

 2 The U.S. HICP-T is defined as the CPI-XT, excluding owners’ equivalent

rent of primary residence and owners’ equivalent rent of secondary

residence.
Monthly Labor Review May 2006 25

groups. A country’s weight is its share (within the multinational

group) of private domestic consumption expenditures—a component of a country’s gross domestic product. The European Index

of Consumer Prices (EICP) is the aggregate price index for the

entire EU.

20 Eurostat also produces indexes for other European

areas and groups of countries, such as the eurozone, and then

publishes these HICP’s in its monthly press release, Statistics in

Focus: Economy and Finance. Included in the release are the

U.S. and Japanese CPI’s, which, Eurostat notes, are not strictly

comparable to the HICP. Table 4 compares the U.S. CPI-U, the

U.S. HICP-T, and the EICP.

21

The chief sources of greater measured inflation in the United

States are motor fuels, gasoline, and medical services and drugs.

All of these U.S. indexes have higher weights, and all exhibit

greater price increases, than their European counterparts. Offsetting this relationship a bit, tobacco and alcohol rose more

rapidly in the European index and have more weight there as

well.

IN SUM, THE DIFFERENCES BETWEEN THE MEASURES should

not be overstated. Although there were some noticeable differences for individual years, the two U.S. measures moved

similarly over the period of study. Nor were differences between the United States and Europe particularly striking. The

fact that the period of study was one of comparatively mild

inflation may have something to do with the relative similarity of

the measures. The Bureau plans to continue producing the

experimental measures, and the conclusions arrived at in this

article may be revisited, especially if the underlying inflation

situation changes.

cp00 All-items HICP .................................... 100.00 100.00 100.00 100.00

cp01 Food and nonalcoholic beverages ....... 16.00 10.83 15.49 10.71

cp02 Alcoholic beverages, tobacco, and

narcotics ............................................. 4.28 1.99 4.28 1.92

cp03 Clothing and footwear ............................ 7.25 5.86 7.21 5.45

cp04 Housing, water, electricity, gas, and

other fuels .......................................... 15.12 13.09 14.55 13.59

cp05 Furnishings, household equipment, and

routine maintenance of the house ..... 7.70 6.19 7.48 6.12

cp06 Health ..................................................... 3.66 7.01 3.66 7.49

cp07 Transport ................................................ 15.08 20.44 14.70 20.34

cp08 Communications ..................................... 2.71 3.40 2.98 3.49

cp09 Recreation and culture ........................... 10.67 9.54 10.61 9.36

cp10 Education ............................................... 1.00 2.85 1.10 2.93

cp11 Restaurants and hotels ......................... 9.49 9.35 9.79 9.44

cp12 Miscellaneous goods and services ....... 7.05 9.44 8.16 9.15

European index of

Consumer Prices

(EICP), 2001

U.S. HICP-T

biennial expenditure

weights,2

1999–2000

Table 3.

Category

Relative importances of the EICP1 and the U.S. HICP-T

Code

European index of

Consumer Prices

(EICP), 2003

U.S. HICP-T

biennial expenditure

weights,2

2001–02

1

 The EICP is the HICP for the 25 countries constituting the European Union

beginning May 1, 2004, or the EU25. The EICP is based on the expenditure

weight year. 2

 The U.S. HICP-T is based on biennial periods: indexes for January 2002

through December 2003 are based on expenditure weights for 1999 and 2000;

indexes for January 2004 through December 2005 are based on expenditure

weights for 2001 and 2002.
26 Monthly Labor Review May 2006

U.S. and European Inflation

Notes

ACKNOWLEDGMENTS: The authors thank John Greenlees for his critical

review; Rob Cage, Joshua Klick, and Cam Taylor for providing the expenditure

weights; Lyubov Rozenthal for performing the index calculations; and Susan

Fleck, Mary Jablonski, Ronald Johnson, John Layng, Wolodar Lysko, and

Jessica Sincavage for editorial assistance. The results remain the responsibility

of the authors and not the Bureau of Labor Statistics.

1

 The Bureau of Labor Statistics uses the term “experimental,” in

contrast to “official,” to denote series that it produces outside of its

regular production systems and, consequently, with less than full production

quality. For security reasons, BLS researchers cannot produce experimental

statistics until after the publication of the corresponding official statistics.

To obtain experimental series referred to in this article, contact either of

the authors.

2

 Until April 30, 2004, the EU consisted of 15 countries, called the

“EU15”: Austria, Belgium, Denmark, Finland, France, Germany, Greece,

Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and

the United Kingdom. On May 1, 2004, the Union admitted 10 additional

countries (Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania,

Malta, Poland, Slovakia, and Slovenia), thereby becoming the “EU25.”

3

 This group is the European Monetary Union (EMU), or, less formally, the “eurozone,” and consists of the EU15, less Denmark, Sweden,

and the United Kingdom. The 10 countries that joined the EU in 2004

will join the EMU and adopt the euro between 2006 and 2010.

4

 See W. Erwin Diewert, “Harmonized Indexes of Consumer Prices:

Their Conceptual Foundations,“ Zeitschrift für Volkswirtschaft und

Statistik 2002, vol. 138, no. 4, pp. 547–637. Available in English on

the Internet at www.econ.ubc.ca/diewert/harindex.pdf. (See also

“Annex 1: The Harmonized Indices of Consumer Prices (European

Union),” in The Consumer Price Index Manual: Theory and Practice

(Geneva, International Labor Office, 2004).)

5

 As of 1990, the noninstitutional urban and metropolitan populations made up about 87 percent of the total U.S. population.

6

 The HICP covers all (institutional and noninstitutional) households

(consisting of either individuals or a group) within the boundaries of a

country. The HICP covers all income levels, nationalities, and residence

statuses. The U.S. CPI-XT covers all income levels, nationalities, and

residence statuses of the urban and rural populations, but not the

institutional population, which is about 2.8 percent, mostly residents of

nursing homes, military bases, and prisons.

7

 For an explanation of U.S. CPI methods, see BLS Handbook of

Methods, chapter 17, “The Consumer Price Index,” on the Internet

at www.bls.gov/cpi/home.htm.

8

 An elementary aggregate is an item category (item stratum) in an

index area. The U.S. CPI’s item classification system defines 211 item

strata covering all consumer items within the scope of the index. The

CPI’s geographic classification system defines 38 urban areas spread

across the four U.S. Census regions (Northeast, Midwest, South, and

West). (Note that 211 × 38 = 8,018.)

The Bureau of Labor Statistics calls the elementary aggregates basic

indexes to emphasize the fact that the U.S. CPI constructs these indexes

out of (lower level) weights. Most other countries’ CPI’s use unweighted

formulas to construct indexes for their elementary aggregates.

9

 The Consumer Price Index Manual: Theory and Practice calls

this index formula a Lowe index. (See chapter 15.)

10 Unfortunately, CPI expenditure weight processing of rural CE data did

not begin until the CE survey for 1999, when the CPI’s processing system

changed to accommodate biennial updating of the weights. CPI weights for

the period ending December 2001 use data from the 1993, 1994, and

1995 CE surveys. Consequently, because the amount of processing would

have been prohibitive, rural weights for pre-2002 index periods were

not obtained for this article.

11 In the Northeast region, small urban places are rare, so small

metropolitan areas were used instead.

12 Monthly data were calculated for all series presented and are

available on request. For brevity, only the December data are shown in

this article.

13 For a more complete discussion, see “Consumer Price Indexes for

Rent and Rental Equivalence,” a CPI Fact Sheet on the subject, on the

Internet at www.bls.gov/cpi/cpifact6.htm.

14 There is some concern in Europe that, because the share of

households that are owner occupied varies widely from country to

country, omitting owner-occupied housing costs while including

renter-occupied housing costs weakens the international comparability of the HICP. (See Ane-Kathrine Christensen, Julien Dupont,

1997 .............................................................. 91.3 — 92.6 — 91.9 —

1998 .............................................................. 92.8 1.6 93.7 1.2 93.3 1.5

1999 .............................................................. 95.2 2.7 96.2 2.7 95.4 2.2

2000 .............................................................. 98.5 3.4 99.2 3.1 98.0 2.7

2001 .............................................................. 100.0 1.6 100.0 .8 100.0 2.1

2002 .............................................................. 102.4 2.4 102.2 2.2 102.1 2.1

2003 .............................................................. 104.3 1.9 104.1 1.8 104.1 1.9

2004 .............................................................. 107.7 3.3 107.9 3.7 106.6 2.4

2005 .............................................................. 111.4 3.4 111.9 3.8 108.8 2.1

SOURCES: Bureau of Labor Statistics, Eurostat.

Table 4. Three price indexes, 1997–2005

December—

[December 2001 = 100]

Level Level Level Percent

change

Percent

change

Percent

change

U.S. CPI–U U.S. HICP-T EICP
Monthly Labor Review May 2006 27

and Paul Schreyer, “International Comparability of the Consumer

Price Index: Owner-Occupied Housing,” paper presented at the OECD

Conference on Inflation Measures, Paris, June 21–22, 2005, for more

on this point.)

15 Comparing the weight shares for the CPI-XT and the HICP in table

2 on page 25 shows how these removals increased the importance of

the nonhousing items.

16 This exhibit is an adaptation of a table from Henning Ahnert and

Mariagnese Branchi, “The HICP as an Anchor for European Price

Statistics,” paper presented at OECD Conference on Inflation Measures:

Too High—Too Low—Internationally Comparable? Paris, June 2005.

The table compares the HICP with the national price indexes of the EU

members. The HICP column in the exhibit is identical to its counterpart in

Ahnert and Branchi’s table.

17 The U.S. CPI nets insurance reimbursements out of the weights for

repairs and replacement purchases, rather than from the weights for

household and vehicle insurance premiums. Like the HICP, the U.S. CPI

also nets out health insurance reimbursements from the weights for

health insurance premiums (and not those of health care providers,

such as hospitals).

18 An earlier, preliminary version of the U.S. HICP was made available

to the public. That version, which consisted of the CPI-U less the stratum for owners’ equivalent rent of primary residence, rose 16.3 percent

between December 1997 and December 2004.

19 The expenditure shares from the 2001 and 2002 CE surveys are the

basis of the weights for the indexes from January 2004 through December

2005; those from the 1999 and 2000 CE surveys are the basis for the

indexes from January 2002 through December 2003. When updated for

price change to the December before their first use in the index, the

expenditure shares are the initial weights for each weight regime. The CPI

production system routinely updates shares, but the index simulation

system presented here does not, because it works at a more aggregated

level.

20 The EICP covered the EU15 until April 2004 and the EU25 thereafter.

21 All series were rebased to December 2001. The CPI-U is published

on a 1982–84 = 100 basis, the EICP on a 1996 = 100 basis.