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. More Frequent Updating Is Deemed Desirable by Individuals Knowledgeable of the CPI That We Contacted

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. According to information obtained from BLS and international publications, seven major industrial countries have consumer price indexes but, among them, only the United States updates its CPI as infrequently as once a decade. Professional Opinions on Updating

Two former BLS officials told us that updating the weights about every 5 years was about right. However, BLS officials noted that some of these countries base their updates on national data that are not comparable to the U.S. continuing CEX. According to BLS, the estimated cost to update the expenditure weights in 2003 would be $3.1 million over a 3-year budget period. The most important reason, they said, was a lack of empirical evidence to support more frequent updates and a void of theoretical guidance on how often to do them. BLS’ Reasons for Not Updating Expenditure Weights More Often

We spoke with the current BLS Commissioner and other current BLS officials about the timing of major revisions and about the obstacles to updating the weights. Although theoretical guidance is not available on all facets of updating expenditure weights, such as exactly when to update, economic literature suggests that an index is more accurate if the expenditure weights used to compute it represent, as much as practical, current consumer spending. III), there is sufficient reason to believe that the weight base had changed appreciably before major revisions to the CPI. BLS estimated that it would cost $3.1 million over 3 years to update the expenditure weights in 2003. If the growth in the CPI decreased by 0.1 percentage point per year, CBO estimates show that this would lead to a cumulative total of a $10.8 billion increase in the projected budget surplus over the 4 years after the update.However, regardless of the effect on the budget, the point of doing an update outside of a major revision would be the increased value of having the CPI reflect, as closely as practical, the current spending patterns of consumers. Objectives, Scope, and Methodology

To obtain views on updating the Consumer Price Index’s (CPI) expenditure weights more often than every 10 years, which addressed our first objective, we asked two former Bureau of Labor Statistics (BLS) officials and eight individuals who have studied the CPI for their views on how often the CPI should be updated. To address our third objective—estimate the dollar effect on the federal budget if the CPI weights were updated on a 5-year cycle—we obtained assistance from BLS and the Congressional Budget Office (CBO). Major revisions were made to the CPI about every 10 years to update the fixed market basket; the next major revision is scheduled to be released in January 1998. In addition, BLS estimated that, for the upcoming 1998 revision, measured inflation will likely be reduced by 0.1 or 0.2 percentage point.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Consumer Price Index (CPI) market basket expenditure weights, focusing on: (1) the views of individuals who were knowledgeable of the CPI on updating the weights between major revisions to the CPI and the practices followed by other industrialized countries in updating their consumer price indexes; (2) the additional cost to the Bureau of Labor Statistics (BLS) to update the weights on a 5-year cycle; (3) the dollar effect on the federal budget if the weights were updated on a 5-year cycle; and (4) BLS' reasons as to why updates of the weights have only occurred during major revisions to the CPI, which have been about every 10 years.

What GAO Found

GAO noted that: (1) the weight of professional opinion supported updating the market basket's expenditure weights more frequently than major revisions to the CPI have been made; (2) GAO spoke with 10 individuals who were knowledgeable about the CPI, and they were unanimous in believing that 10 years between updates was too long to reflect "current" consumer spending; (3) there was less agreement among the 10 individuals, however, on exactly how often updates should occur; (4) other major industrial countries update their consumer price indexes more often than the United States, according to information provided by BLS and contained in international publications; (5) however, BLS officials noted that some of these countries based their updates on national data that are not comparable to data used by the United States; (6) the cost of updating the expenditure weights is significantly less than the cost of a major revision; (7) BLS estimated that the cost to update the weights in 2003 would be about $3.1 million; (8) in comparison, BLS estimates that it will spend about $66 million on the upcoming 1998 revision; (9) because federal tax brackets and federal payments are adjusted for inflation, a CPI that more accurately measures inflation could affect the federal budget; (10) the Congressional Budget Office estimated that, assuming no other changes in policy or economic assumptions, if updating the weights in 2003 (5 years after the planned 1998 revision) reduced the CPI growth by 0.1 percentage point annually, the projected budget surplus would be increased by a cumulative total of $10.8 billion over the 4-year period of 2004 through 2007; (11) BLS cited several reasons for not updating the expenditure weights between major CPI revisions; (12) the foremost reasons, according to BLS, were a lack of empirical evidence to support more frequent updates and a void of theoretical guidance on how often to do them; (13) 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 GAO reviewed supports the need for updating expenditure weights more frequently than about every 10 years; and (14) BLS' concerns about updating the expenditure weights between major revisions were indicated in June 1997, when BLS officials said that BLS has the technical ability to update the expenditure weights, but it must work through the challenging issues that now surround the CPI program.