A comprehensive cost-of-living index would be broader in coverage than an index based on consumer expenditures or consumer budgets. Objectives, Scope, and Methodology

The Ranking Minority Member of the House Committee on Banking and Financial Services asked us to (1) determine if a change made to the housing component in the early 1980s made the CPI either more or less suitable for use as a cost-of-living measure and (2) identify the advantages and disadvantages of changing the current measurement of medical care costs to an approach that more closely matches a cost-of-living measure. Since rent is the ‘price of using,’ rental equivalence enhances the use of the CPI as a proxy for the cost of living.” A few of the experts also noted that additional improvements, such as including environmental costs and taxes in the CPI, would make it more like a cost-of-living index. Medical care expenses paid by third parties, such as employers, which make up about two-thirds of all medical care expenses, are excluded from the CPI. The second kind of data reflects the prices paid for items in the CPI. 3.2). BLS Does Not Plan to Include Third-Party Payments

BLS does not plan to include third-party payments in the medical care component. Observations

According to BLS, the CPI is not a cost-of-living index but a measure of the change in prices of a fixed market basket of goods and services. They all said it made the CPI more suitable as a cost-of-living index. The overall impact of changing the medical care component of the CPI is unknown. The Commissioner said the draft report asserted that incorporating expenditures on medical care goods and services by third-party payers would move the CPI toward “the cost-of-living concept.” According to the Commissioner, this argument implies that there exists one theoretically correct, comprehensive measure of the cost of living and that the CPI deviates from this measure because it lacks a cost-of-living concept as a measurement objective.
Why GAO Did This Study

Pursuant to a congressional request, GAO determined: (1) whether changes made to the housing component of the consumer price index (CPI) made it more or less suitable as a cost-of-living measure; and (2) the advantages and disadvantages of changing the current measurement of medical care costs to a cost of living measurement.

What GAO Found

GAO found that: (1) the CPI is not a cost-of-living index, but a measure of the change in prices paid for a fixed market of goods and services; (2) a comprehensive cost-of-living index is broader in coverage than an index based on consumer expenditures and budgets; (3) the Bureau of Labor Statistics (BLS) uses the rental equivalence method to better measure housing costs within the CPI structure; (4) this method has made the CPI more suitable for measuring cost of living; (5) two-thirds of medical care expenses are excluded from the CPI, since they are paid by third parties payers; (6) including third-party payments in the CPI would move the CPI towards a cost-of-living index; (7) BLS excludes third-party payments from the CPI to better represent direct expenditures by consumers; (8) changing the medical care component of CPI would improve the formulation of health-care-specific policies and macroeconomic policies, but there is little technical feasibility in making such changes; (9) the Stigler committee believes that CPI should better reflect the cost-of-living index; (10) it is difficult to design a cost-of-living index for the federal government because of the additional uses of CPI; and (11) policymakers need to consider how the CPI will be affected by changing the medical care component and whether any single price index can account for such cost-of-living measurements.