The CPI measures the change in prices of a fixed market basket of goods and services purchased directly by urban consumers. 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 expenditures made by consumers are captured in the CPI. The CPI is used by the federal government, businesses, labor organizations, and private citizens. According to BLS, the CPI is used as an economic indicator of inflation; an escalator for wages, income payments, and tax brackets; and a deflator of selected economic statistical series. For example, through collective bargaining contract negotiations in 1996, 1.7 million workers had their wages raised on the basis of changes in the CPI. As a result of changes in prices as reported in the CPI in 1996, 43.5 million Social Security beneficiaries and 25.8 million food stamp recipients had their benefits increased for inflation in 1996. According to BLS, to construct the CPI, the prices of more than 94,000 items are collected each month (e.g., margarine sold in tubs, sticks, or squeeze bottles) and aggregated into 206 “item strata” (e.g., fats and oils). In making the monthly calculations, according to BLS, weights are used to give proportionate emphasis for price changes of one item in relation to other items in the CPI. According to BLS, two sets of weights are computed from different sources of information. BLS computes one set of weights from the Consumer Expenditure Survey (CEX) data. These weights, which are the focus of this report, are used to aggregate the 206 item strata into the overall index number for the CPI. In this report, we refer to this first set of weights as “expenditure weights.” The second set of weights is derived primarily from information taken from the Point-of-Purchase Survey (POPS). These weights, which we term “point-of-purchase weights” in this report, are used to combine the prices of the 94,000 items into the 206 item strata. In other words, the point-of-purchase weights are used to aggregate the prices of the individual items into the 206 item strata and provide the base to which the expenditure weights are applied to calculate the CPI. The two sets of weights are updated at different time intervals. BLS began to publish the CPI regularly in 1921 and has changed expenditure weights only when making major revisions to the CPI. These major CPI revisions occurred in 1940, 1953, 1964, 1978, and 1987; another revision is scheduled for 1998. BLS instituted the POPS in 1978. All of the point-of-purchase weights are scheduled to be updated over a 5-year period, according to BLS. The CPI is often referred to as a cost-of-living index and is used to reflect the cost of living to adjust, for example, federal income tax brackets and some federal payments. Although some elements of the CPI reflect cost-of-living concepts, the CPI was not designed to be a cost-of-living index. As usually defined, a cost-of-living index would be broader in coverage than an index that is based on consumer expenditures. BLS has said through the years that the CPI is not a cost-of-living index. To date, the federal government has not developed a comprehensive cost-of-living index. In 1961, the Price Statistics Review Committee (hereafter called the Stigler committee for its chairman, George Stigler) recommended that the conceptual framework of the CPI be modified to represent a cost-of-living index. It also supported comprehensive revision of CPI weights at least once every decade and suggested that the more volatile categories of CPI weights be updated at least once every 5 years. The BLS Commissioner in 1961 agreed that the CPI should be revised every 10 years. Although the Commissioner agreed with the suggestion to update CPI weights more often, he cited some obstacles that he thought, at the time, would preclude BLS from doing so. We discuss these obstacles later in this report in the section on BLS’ reasons for not updating expenditure weights more often. In reporting to Congress in December 1996, the Boskin commission said its overarching recommendation was that BLS establish a cost-of-living index as its objective in measuring consumer prices. The Boskin commission concluded that the CPI overstates inflation because of four sources of bias: substitution bias, new products bias, quality change bias, and new outlets bias. The commission further subdivided substitution bias into what it termed lower-level bias and upper-level bias. The lower-level bias concerns the aggregation of the prices of the individual items, and the upper-level bias concerns the 206 item strata, which are the subject of this report. To address upper-level substitution bias, the Boskin commission recommended that the fixed market basket CPI be abandoned and replaced with two new formulas that would enable the CPI to more closely reflect the cost of living. One formula, according to the commission Chairman, would be a true superlative index; the other formula would be a modified superlative index. A superlative index, by definition, would continually change the market basket to reflect current consumer spending. BLS has requested funding for fiscal year 1998 to continue the fixed market basket CPI and to publish a CPI with a superlative index formula in 2002. Since the fixed market basket CPI would continue to be published, the discussion on how frequently to update the expenditure weights is pertinent. To obtain opinions on updating the CPI expenditure weights more often, we asked two former BLS officials and eight others who were knowledgeable about the CPI how often the weights should be updated. The eight other individuals had conducted research in connection with the CPI: four of the eight individuals were members of the Boskin commission, two were academicians, one was employed by a major economic research institution, and one was a member of the Stigler committee. (App. I describes how we selected these eight individuals.) To obtain information on the practices followed by other industrialized countries in updating their consumer price indexes, which also addresses our first objective, we obtained information from BLS and from publications of the Organization for Economic Cooperation and Development and the Canadian government on how often G-7 countries update their CPIs. To estimate the cost to BLS of updating the expenditure weights for the CPI on a 5-year cycle, we asked BLS to provide us with certain actual and estimated cost data. We asked BLS to provide us with the costs associated with the 1987 revision and the projected costs for the 1998 revision. In addition, we asked BLS for its estimate of what the costs would have been to update the CPI in 1992 and its estimate of what the cost might be to update the CPI in 2003. We did not specify to BLS what assumptions to make or what items to include or exclude in estimating the costs for 1992, 1998, and 2003. We also did not evaluate the reasonableness of BLS’ assumptions or estimates. BLS provided us with costs for the 1987 revision and estimated costs for the 1998 revision and a 2003 update of the CPI. BLS suggested that the cost for a 1992 update could be derived by deflating the cost of the 2003 update, which we did with the Gross Domestic Product (GDP) price index. To estimate the dollar effect on the federal budget if the expenditure weights for the CPI were updated on a 5-year cycle, we obtained assistance from BLS and CBO, which analyzes budget-related issues and provides cost estimates for legislative proposals to Congress. We asked BLS to provide a range—an upper percentage point and a lower percentage point—of the possible change that would occur to the CPI with a 5-year update. We asked CBO to estimate the effect that a 5-year update of the CPI would have on the federal budget, assuming no other changes in tax or spending levels and no other changes in the economy. To do this, we asked CBO to use BLS’ lower and upper estimates of change and the midpoint of these estimates. To illustrate the effect of a 5-year update that would begin in 2003, we asked CBO to make projections for the years 2003 through 2007 as it normally would and then to do a reestimation after adjusting for the effects of a 5-year update. CBO’s policy is to provide projections for current and future years, but not to provide estimates for past years. For that reason, we estimated how the federal budget might have been affected if the expenditure weights had been updated in 1992, which was 5 years after the 1987 major revision. In making our estimates, we used CBO’s estimates for 1998 through 2007 to backcast to 1992. In doing so, we assumed that the trend that was used for the years 1998 through 2007 could be reasonably applied to the years 1993 through 1998. We discussed the methodology we used in making the estimates with CBO officials, and they said that the methodology we used and the results we obtained were reasonable. In connection with impact on the federal budget, as requested by your office, we asked the Chief Actuary of the Social Security Administration (SSA) to estimate the effect a change in the CPI would have on the average benefit paid to retired workers. To make the estimate, we asked SSA to use the midpoint of BLS’ range of possible change that would occur to the CPI with a 5-year update. Using that midpoint percentage point and economic assumptions used in the President’s Fiscal Year 1998 Budget, SSA estimated the change in the average monthly benefit check for retired workers, beginning with December 2003, which would be payable in January 2004, and continued through December 2007.