How the CPI “weights” changed and moved the CPI: Meet the surprises

In numbers and diagrams: The weight changes in the major CPI categories pushed up the overall CPI.

By Wolf Richter for WOLF STREET.

There has been something of a balloo in certain circles recently about the adjustment of weights for the calculations of the Consumer Price Index (CPI) by the Bureau of Labor Statistics. Swirling around in this balloo were suggestions that the BLS is absolutely adjusting the weights to manipulate the CPI down and further deceive Americans about inflation. So we’re going to look at the actual weights and numbers and charts, to see how the weights changed in recent years and for 2023. So meet the surprises.

There are approximately 330 detailed goods and services in the consumer basket that make up the CPI. This covers just about anything consumers buy. Each of these goods or services is assigned a weight in the overall index that determines its “relative importance” in the overall index. All goods and services added together have a weight of 100%. It never changes. What changes are the weights of the individual categories, some weights increase, others decrease, but the sum always = 100%.

The BLS adjusts these weights based on consumers’ changing purchasing patterns. When consumers spend a greater proportion of their total consumption on good X than they used to, the weight of good X increases. Conversely, they will spend a smaller part of their total consumption on good Y, and the weight is reduced accordingly. The idea is to keep the CPI curve up to date with current consumer buying patterns, which change over time.

These adjustments used to be made on a two-year cycle. From 2023, the adjustments to the weights will be made every year to capture changes in consumption more quickly. During Covid, there were massive changes in consumption patterns, which caused confusing distortions in the economy. But because the weight adjustments occurred on a two-year cycle, they initially missed the big changes. So going forward, the adjustments will be made annually, the BLS said.

Here are nine main categories that together make up 83% of the total CPI:

“Shelter rent”, a big inflation: the weight increased, pushed up the CPI.

The weight of “shelter rent”—a stand-in for housing costs that make up roughly one-third of the CPI—was increased in 2022. Because the “shelter rent” CPI increased in 2022, the higher weight made the overall CPI worse in 2022.

The weight was increased from 32.05% in November 2021 to 32.42% in January 2022, and to 34.04% in January 2023.

In January 2023, with the shelter rental CPI a red-hot +0.8% month-on-month and +8.0% year-on-year, the higher weighting made the CPI even worse:

Food at home: weight increased, pushed up CPI.

The weight of food at home – food and drink that people buy in stores – increased in 2022 with an increase in purchases in 2020 (remember that was on a 2-year cycle). The weight has now jumped from 7.7% in November 2021 to 8.7% in January 2023.

Year-over-year CPI for food at home has been in double digits for 10 consecutive months. And the higher weights made the CPI even worse so far:

Food from home: weight dropped, pushed down CPI.

Food away from home includes restaurants, delis, vending machines, school cafeterias, corporate workplaces, etc. This industry was crushed during the pandemic. Restaurants have recovered, except for those trying to make a living on office lunches; they were hammered by working from home, which also hammered company meal services in office buildings that used to be touted as a major benefit. Many companies closed these eateries because people are working from home. So overall, people ate more at home, and used company lunch and dinner facilities less often.

And the weight of food from home fell from 6.3% in November 2021 to 4.8% in January 2023, with the largest drop for 2022, and a smaller drop for 2023:

New and used vehicles: Weight changes pushed up the CPI.

Number of new vehicles sold to end users plunged in 2020, 2021 and 2022 to levels first seen in the 1970s due to supply chain shortages, particularly semiconductor shortages. As inventory was depleted, new vehicle prices rose, and month after month for 12 straight months, from October 2021 to September 2022, the CPI for new vehicles increased by over 10% year-on-year.

The weight rose from 3.9% in November 2021 to 4.3% in January 2023, which, given the increase in the new vehicle CPI, made the overall CPI worse.

Sales volume for used vehicles fell significantly from pre-pandemic levels, largely due to the most astonishing price rises ever, with the CPI for used vehicles increasing by 45% year-on-year in the summer of 2021, and enough people just saying no, and for the past 12 months, The CPI for used vehicles actually fell.

The weights were adjusted higher in January 2022 to 4.2%, but were then reduced to 2.7% in January 2023. Due to used car prices have fallen for a whole yearthe lower relative importance of the falling used vehicle CPI pushed up the overall CPI so far:

Gasoline: weight fell, as consumption fell.

Gasoline is one of those products that, when the price rose through mid-2022, people cut consumption. According to EIA data, US gasoline consumption, measured in barrels per day, fell 4.5% in 2022 from 2021.

During the last six months of 2022, gasoline prices fell. In January, the CPI for petrol was only slightly higher than in January a year ago

The weight of petrol fell from 3.9% in November 2021 to 3.2% in January 2022. With little year-on-year price change for petrol in January, the overall CPI was not greatly affected.

Medical care services: weight decreased, and in an interesting twist, the overall CPI pushed up.

This category does not include medical drugs, a category of its own. The weight fell from 6.97% in January 2022 to 6.65% in January 2023.

This is an interesting twist. Medical services include health insurance. Starting in October 2022, the CPI for health insurance was massively revised down for the next 12 months, compensating for the overestimate in the previous 12 months. After this adjustment, the health insurance CPI month-on-month has been deeply negative, dragging the overall CPI for medical services down into the negative (-0.7% in January month-on-month).

By reducing the weight of medical services in the overall CPI in January for 2023, the negative CPI for medical services weighs less in the overall CPI, and the reduction in the weight of this negative number results in pushing up the overall CPI. You might have to read this sentence a couple of times – like I said, an interesting twist.

Household furniture: weight increased, overall CPI increased.

Remember what we said: these weights are adjusted for previous years’ consumption patterns. And during Covid, consumers bought all sorts of things to fix up their homes and outdoor spaces – furniture, window and floor coverings, appliances, lamps, tools, tableware, etc., for all sorts of reasons, including to prepare the home for working from home, which causing an epic increase in this type of purchase.

And the weight increased from 3.8% in November 2021 to 4.4% in January 2023. With the CPI for household furniture jumping 0.5% month-on-month and 6.4% year-on-year, the higher weighting of this warm category the total CPI.

Recreational services: weight decreased

This category includes video and audio subscriptions, cable, streaming services, etc. The CPI for this category has increased by 3.9% year-on-year.

Weight dropped from 3.7% in November 2021 to 3.1% in January 2023. I’m not sure why. Maybe people started going out again and spending less on entertainment services at home:

Clothes: don’t you buy those office clothes?

Working from home was a nightmare for clothing retailers that sell clothes that people wear to the office. But some of that may now have turned, perhaps in the midst of a battle of revenge spending on travel outfits.

The weight fell from 2.7% in November 2021 to 2.4% in November 2022, but in January the weight was raised to 2.5%. The clothing CPI was hot in January, at 0.8% month-on-month, but year-over-year was only up 3.1%.

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