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

In numbers and charts, the weight changes in the major CPI categories pushed up the overall CPI.

By Wolf Richter for WOLF STREET.

There has been quite a bit of commotion in certain circles recently about the adjustment of weights for the calculation of the Consumer Price Index (CPI) by the Bureau of Labor Statistics. Floating around in this bustle were suggestions that the BLS is definitely adjusting the weights to manipulate the CPI downward and further mislead Americans about inflation. So we’re going to look at the actual weights and numbers and charts, to see how the weights have changed over the last few years and for 2023. So get to know the surprises.

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

The BLS adjusts these weights based on changing consumer buying habits. When consumers spend a larger proportion of their total expenditure on item X than before, the weight of item X increases. Conversely, they spend a smaller portion of their total expenditure on item Y and its weight is reduced. The idea is to keep the CPI basket up to date with current consumer buying patterns, which change over time.

In the past, these adjustments were made in a two-year cycle. From 2023 onwards, the weights will be adjusted annually to accommodate shifts in spending more quickly. There were massive shifts in spending patterns during Covid, causing mind-boggling disruptions in the economy. But because the weight adjustments happened 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 account for 83% of total CPI:

“Lodging Rentals,” a high-inflation biggie: weight increased, CPI increased.

The weight of “lodging rent” – a substitution for housing costs that accounts for about a third of the CPI – was raised in 2022. As the CPI for “lodging” peaked 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 a red-hot +0.8% month-on-month and +8.0% year-over-year, the higher weight made the CPI even worse:

Eating at home: weight increased, CPI increased.

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

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

Eating out: Weight went down, CPI went down.

Eating out 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 from lunch at the office; which were hammered by working from home, which also hammered company-provided meal services into office buildings, which used to be touted as a major advantage. Many companies have closed that eatery because people are working from home. So, overall, people ate more at home and used the company-provided lunch and dinner facilities less often.

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

New and Used Vehicles: Weight changes led to a higher CPI.

The number of new vehicles sold to end users declined in 2020, 2021 and 2022 to levels first seen in the 1970s due to supply chain shortages, particularly semiconductor shortages. With stocks depleted, new vehicle prices skyrocketed, and month after month for 12 months straight, from October 2021 to September 2022, the CPI for new vehicles rose more than 10% year-on-year.

Weight increased from 3.9% in November 2021 to 4.3% in January 2023, which, given the increase in new vehicle CPI, worsened the overall CPI.

Sales volume of used vehicles dropped significantly from pre-pandemic levels, largely due to the most mind-boggling price spikes ever, with the used vehicle CPI rising 45% year-over-year in Summer 2021, and enough people just said no, and for the In the past 12 months, the CPI for used vehicles has actually fallen.

The weightings were adjusted higher to 4.2% in January 2022, but then lowered to 2.7% in January 2023. Because Used vehicle prices have been falling for an entire yearthe lower relative importance of the falling CPI for used vehicles pushed the overall CPI up so far:

Gasoline: weight decreased, while consumption decreased.

Gasoline is one of those products that, when the price peaked until mid-2022, people reduced their consumption. US gas consumption, measured in barrels per day, is down 4.5% in 2022 from 2021, according to EIA data.

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

The weight of gasoline fell from 3.9% in November 2021 to 3.2% in January 2022. With few year-over-year price changes for gasoline in January, the overall CPI was not significantly affected.

Medical Care: Weight dropped, and in an interesting twist, overall CPI rose.

Medicines do not fall under this category, a category in itself. The weight decreased from 6.97% in January 2022 to 6.65% in January 2023.

This is an interesting twist. Medical services include health insurance. From October 2022, the health insurance CPI was massively revised downwards for the next 12 months, making up for the overstatement in the previous 12 months. After this adjustment, the CPI of health insurance was very negative month-on-month, and the overall CPI of medical care dragged to negative (-0.7% in January month-on-month).

By reducing the weight of medical services in the January 2023 total CPI, the negative medical services CPI weighs less in the total CPI, and the reduction of the weight of this negative number results in an increase in the total CPI. You may need to read this sentence a few times – like I said, an interesting twist.

Household furniture: weight increased, general CPI increased.

Remember what we said: these weights are adjusted to the consumption pattern of previous years. And during Covid, consumers bought all kinds of stuff to spruce up their homes and patios – furniture, window and floor coverings, appliances, lamps, tools, dishes, etc., for a variety of reasons, including to prepare the home for working from home, which caused an epic spike in these types of purchases.

And the weight increased from 3.8% in November 2021 to 4.4% in January 2023. With the CPI for home furnishings up 0.5% month over month and 6.4% year over year, the higher weight of this hot category the overall CPI up.

Recreational services: weight decreased

This category includes video and audio subscriptions, cable, streaming services, etc. The CPI for this category is up 3.9% year over year.

The weight dropped from 3.7% in November 2021 to 3.1% in January 2023. Not sure why. Perhaps people went out again and spent less on home entertainment services:

Clothes: Don’t buy those office clothes?

Working from home has been a nightmare for clothing retailers selling clothes people wear to the office. But some of it may have turned around now, perhaps amid vengeful spending on travel clothes.

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

Enjoy reading WOLF STREET and do you want to support it? You can donate. I really appreciate it. Click on the beer and iced tea mug to see how:

Would you like to be notified by email when WOLF STREET publishes a new article? Register here.






Leave a Reply

Your email address will not be published. Required fields are marked *