December 1998 Consumer Price Index

Historical release narrative reproduced from the official public-domain source. Statistical tables, standard technical appendices, administrative material and attendance rosters are omitted; formatting is adapted for reading. Figures retain the release's historical context and may have been revised. Consult the linked source for the complete document.

The Consumer Price Index for All Urban Consumers (CPI-U) declined 0.1 percent in December, before seasonal adjustment, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. The December 1998 CPI-U level of 163.9 (1982-84=100) was 1.6 percent higher than the index in December 1997.

The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) was unchanged in December, prior to seasonal adjustment, remaining at a level of 160.7. For the 12-month period ended in December, the CPI-W has increased 1.6 percent.

CPI for All Urban Consumers (CPI-U)

On a seasonally adjusted basis, the CPI-U rose 0.1 percent in December, following increases of 0.2 percent in each of the preceding two months. The food index was unchanged in December after advancing 0.1 percent in November. The index for food at home, which increased 0.2 percent in November, declined 0.2 percent in December, reflecting further decreases in the indexes for fruits and vegetables and for meats, poultry, fish, and eggs and a downturn in the index for other food at home. The energy index, which was unchanged in November, fell 1.4 percent in December. The index for petroleum-based energy declined 2.9 percent, and the index for energy services decreased 0.3 percent. Excluding food and energy, the CPI-U increased 0.3 percent in December, following increases of 0.2 percent in each of the preceding four months. Three-fourths of the December rise in the index for all items less food and energy was accounted for by a 18.8 percent rise in the index for cigarettes, reflecting the pass-through to retail of the 45-cents-a-pack wholesale price increase announced by major tobacco companies in late November.

As previously announced, effective with release of data for January 1999, the BLS will introduce a new formula for calculating the basic components of the CPI. See page 5 for more details. See pages 6-10 for announcements of other methodological changes to be introduced with data for January 1999.

For the 12-month period ended in December 1998, the CPI-U rose 1.6 percent. This compares with an advance of 1.7 percent in 1997 and was the smallest annual increase since a 1.1 percent rise in 1986. The energy component, which generally has acted as a moderating influence on the overall change in consumer prices since the early 1980's, registered its largest annual decline--down 8.8 percent in 1998--since a 19.7 percent drop in 1986. Petroleum-based energy costs fell 15.1 percent, and charges for energy services decreased 3.3 percent. The food index rose 2.3 percent in 1998. Grocery store food prices rose 2.1 percent after advancing 1.0 percent in 1997. Each of the six major grocery store food groups accelerated in 1998, relative to 1997, except for the index for nonalcoholic beverages, which declined 1.1 percent after increasing 4.9 percent in 1997. This group's decline was due to the sharp deceleration in coffee prices, which fell 8.8 percent in 1998 after increasing 16.9 percent in 1997. The index for dairy products showed the sharpest acceleration, advancing 6.6 percent in 1998 after declining 0.5 percent in the previous year.

The CPI-U excluding food and energy advanced 2.4 percent in 1998, following an increase of 2.2 percent in 1997. The slightly larger increase in 1998 than in the preceding year was attributable to the sharp rise in tobacco prices--up 31.8 percent--which accounted for 15 percent of the annual increase in the index for all items less food and energy. The rates for selected groups during the past five years are shown below.

Percent change 12 months ended in December

The food and beverages index was unchanged in December. The index for food at home, which rose 0.2 percent in November, declined 0.2 percent in December, reflecting further decreases in the indexes for fruits and vegetables and for meats, poultry, fish, and eggs and a downturn in the index for other food at home. The index for fruits and vegetables declined 0.9 percent in December, the same as in November. In December, the index for fresh vegetables fell 3.1 percent, more than offsetting a 0.9 percent rise in the index for fresh fruits. The index for processed fruits and vegetables declined for the fourth consecutive month--down 0.3 percent in December. Despite registering declines in the last two months, the index for fruits and vegetables rose 4.9 percent in 1998 after advancing 2.2 percent in 1997. The index for meats, poultry, fish, and eggs declined 0.3 percent in December to a level 0.7 percent below a year ago, its second consecutive annual decrease. The index for pork declined 0.3 percent in December and 5.8 percent in the last 12 months. The index for beef rose 0.3 in December to a level 0.1 percent above a year ago. Poultry prices declined 0.2 percent in December, but rose 2.6 percent in 1998. The index for other food at home declined 0.3 percent in December, reflecting a sharp drop in prices for fats and oils. Within this group, butter prices fell 9.7 percent in December, but were up 31.7 percent over the year. The index for nonalcoholic beverages declined 0.3 percent in December and 1.1 percent over the last 12 months after increasing 4.9 percent in all of 1997. Coffee prices fell 8.8 percent in 1998 after increasing 16.9 percent in 1997. The indexes for dairy products and for cereal and bakery products rose 1.1 and 0.1 percent, respectively, in December and 6.6 percent and 2.2 percent in all of 1998. The other two components of the food and beverage index--food away from home and alcoholic beverages--rose 0.2 and 0.4 percent, respectively, in December. During the last 12 months, these groups increased 2.5 and 2.0 percent, respectively.

The housing component rose 0.1 percent in December. Shelter costs rose 0.2 percent, bringing the annual increase to 3.3 percent in 1998. Within shelter, the indexes for rent and for owners' equivalent rent each rose 0.3 percent in December, while the cost of lodging away from home decreased 1.4 percent. The index for fuels and utilities declined 0.2 percent in December. The index for household fuels fell 0.4 percent, reflecting declines in the indexes for fuel oil and for natural gas--down 2.2 and 1.1 percent, respectively. Charges for electricity were unchanged. For the 12-month period ended in December, prices for fuel oil fell 15.2 percent and charges for natural gas and for electricity declined 3.5 and 3.2 percent, respectively. Among other utilities, the index for water and sewerage treatment rose 0.4 percent in December and 2.7 percent in the last 12 months. The index for garbage and trash collection increased 0.3 percent in December and 2.8 percent over the year. The index for household furnishings and operations increased 0.2 percent in December and 1.2 percent in all of 1998.

The transportation component declined 0.4 percent in December and 1.7 percent in all of 1998. Falling gasoline prices were responsible for both the one-month and 12-month decline in transportation costs. The index for gasoline fell 2.9 percent in December, bringing the decline over the last 12 months to 15.4 percent. As of December, gasoline prices were 27.9 percent lower than their peak level in November 1990. The index for new and used vehicle prices was unchanged in December. The index for new vehicles rose 0.1 percent. (Prior to seasonal adjustment, new vehicle prices rose 0.4 percent.) As of December, over 70 percent of the new vehicle sample was represented by 1999 models. The 1999 models will continue to be phased in, with appropriate adjustments for quality change, over the next several months as they replace old models at dealerships. (For a report on quality changes for the 1999 vehicles represented in the Producer Price Index sample, see news release USDL-98-457, dated Nov. 13, 1998.) The index for used cars and trucks decreased 0.6 percent. For the 12-month period ended in December, new vehicle prices were unchanged, while used car and truck prices rose 3.5 percent. Public transportation costs, which had declined in each of the preceding three months, increased 1.2 percent in December, reflecting a 1.0 percent rise in airline fares.

The index for apparel decreased 0.8 percent in December. (Prior to seasonal adjustment, apparel prices fell 3.2 percent, reflecting pre- holiday discounting.) During the 12-month period ended in December, apparel prices fell 0.7 percent, following a 1.0 percent rise in all of 1997.

Medical care costs rose 0.3 percent in December to a level 3.4 percent above a year ago. The 1998 increase follows a 2.8 percent rise in 1997 and represents the first acceleration in the annual increase since 1990, when the medical care component advanced 9.6 percent. In December, the index for medical care commodities--prescription drugs, nonprescription drugs, and medical supplies--increased 0.5 percent. The index for medical care services rose 0.2 percent. Charges for professional services and for hospital and related services each increased 0.2 percent in December and 3.3 and 3.2 percent, respectively, in 1998.

The index for recreation costs was unchanged in December, but advanced 1.2 percent in all of 1998. During the last 12 months, cable television costs increased 6.9 percent, and club membership dues and admissions to sporting events each rose 5.0 percent. These increases were partially offset by declines in prices for toys, photographic equipment, televisions, and other video equipment.

The index for education and communication declined 0.1 percent in December, as a 0.5 percent rise in educational costs was more than offset by a 0.7 percent decrease in the index for communication. Within the latter group, the indexes for telephone services and for information and information processing other than telephone services declined 0.8 and 1.4 percent, respectively. During the 12 months ended in December, education costs rose 4.7 percent, with college tuition costs up 3.9 percent. Communication costs declined 2.9 percent during that period, reflecting a 35.8 percent decrease in the index for personal computers and peripheral equipment.

The index for other goods and services increased 4.2 percent in December, reflecting a 18.3 percent increase in the index for tobacco and smoking products. For the 12 months ended in December, the index for tobacco and smoking products increased 31.8 percent.

CPI for Urban Wage Earners and Clerical Workers (CPI-W)

On a seasonally adjusted basis, the CPI for Urban Wage Earners and Clerical Workers increased 0.2 percent in December.

Consumer Price Index data for January are scheduled for release on Friday, Feb. 19, 1999, at 8:30 A.M. (EST).

Planned Change in the Consumer Price Index Formula

On April 16, the Bureau of Labor Statistics announced its decision to use a new formula for calculating the basic components of the Consumer Price Index for all Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). This change will become effective with data for January 1999. The new formula, the geometric mean estimator, will be used in index categories that comprise approximately 61 percent of total consumer spending represented by the CPI-U. The remaining index categories, which are shown in the table below, will continue to be calculated as they are currently. Based upon BLS research, it is expected that planned use of the new formula will reduce the annual rate of increase in the CPI by approximately 0.2 percentage point per year. The geometric mean estimator will be introduced in both the CPI-U and the CPI-W effective with data for January 1999, in accord with the past practice of introducing methodological changes at the beginning of a calendar year. BLS will continue to publish "overlap" CPI-U and CPI-W series using the current calculation method for the first six months of 1999. These indexes will not be published regularly for months subsequent to June 1999, but will be available upon request. Additional information on this change will be published in the April 1998 CPI Detailed Report and is available on the Internet (http://stats.bls.gov/cpihome.htm). This information may also be obtained by writing to the Bureau of Labor Statistics, Division of Consumer Prices and Price Indexes, 2 Massachusetts Ave. N.E., Room 3615 Washington, D.C. 20212 or by calling (202) 606-7000.

Arithmetic Mean (Laspeyres) Formula

1. Selected shelter services:

A) Rent of primary B) Owners' equivalent C) Housing at school, residence rent of primary excluding board residence

2. Selected utilities and government charges:

A) Electricity C) Residential water and E) Telephone services, sewerage maintenance local charges

B) Utility natural gas D) State and local F) Cable television service registration, license, and motor vehicle property tax

3. Selected medical care services:

A) Physicians' services C) Eyeglasses and eye E) Hospital services care B) Dental services D) Services by other F) Nursing homes and medical professionals Adult daycare

Changing the Treatment of Mandated Pollution Control Measures in the Consumer Price Index

Beginning in 1999, modifications to goods and services made solely for purposes of meeting air pollution standards, and that do not otherwise provide direct value to consumers, will no longer be treated as quality improvements in the Consumer Price Index (CPI). Price increases associated with such modifications will be reflected as increases in the index.

The Bureau of Labor Statistics (BLS) recently undertook to explain more precisely the relationship between the CPI and a complete measure of changes in consumers' living costs. As part of this activity the BLS reviewed the treatment of pollution control measures in the CPI. The new policy for treating pollution control measures is a direct result of that review.

BLS has stated that the proper objective of the CPI is to approximate changes in the cost of living of U.S. consumers /1. The CPI is intended to approximate a particular subindex of a complete cost-of-living index, a subindex that is limited to prices of market goods and services and is conditional upon the levels of other determinants of changes in living costs, such as the environment, crime level, and numerous government- provided goods and services. The choice of this index definition recognizes that not all important living cost determinants can be reliably measured and also provides users of the CPI with a clear specification of its scope and limitations.

Given the current definition, changes in air quality, as well as in other important environmental factors, are beyond the scope of the CPI and thus properly cannot be included in its construction. A more complete explanation of the relationship between the CPI and a comprehensive measure of changes in living costs is contained in "The Treatment of Mandated Pollution Control Measures in the CPI." /2

The new policy for the treatment of air pollution measures will become effective with CPI data for January 1999. The new practice will have its most significant effect on the motor fuel and new and used motor vehicle components of the index. In the vehicle indexes, the policy will apply to all vehicle models introduced on or after January 1, 1999. Since most of the 1999 model-year vehicles will be introduced before that date, the old practice will be used for the 1998-to-1999 model-year changeover in most cases.

Historically, quality adjustments for anti-pollution measures have been made to the new car (or new vehicle) component of the CPI since 1969 (automobile model year 1970), with their estimated dollar effect published annually. Since 1988, these data have also been utilized to make quality adjustments in the used car component. In addition, beginning in late 1994, quality adjustments were made for the introduction of reformulated gasoline, which was required in selected areas for compliance with the Clean Air Act Amendment of 1990. Available information is not sufficient to make possible a complete accounting of the impacts of this policy in all years. The estimates presented below should be viewed, therefore, as approximations rather than as precise values. In adherence with standard policy, the official CPI historical data will not be revised to be consistent with the new practice. For the period from December 1968 through December 1997, the new car component of the CPI-U rose 174.2 percent. BLS estimates that not adjusting for anti-pollution measures would have resulted in an increase of 230.2 percent over this period. Quality adjustments for light trucks have been made since they were introduced into the CPI in 1983. For the period from December 1983 through December 1997, this index rose 51.4 percent, but with the quality adjustments for anti-pollution measures factored back into the index, it would have risen by an estimated 55.1 percent in this period. The CPI used car index rose 27.2 percent between December 1987 and December 1997; with the quality adjustments for anti- pollution measures factored back into the index, it would have risen approximately 28.8 percent in that 10-year period. The motor fuel component, whose index rose 7.5 percent between December 1993 and December 1997, would have increased by an estimated 15.4 percent over that period if adjustment for environmental quality change had not been made. BLS estimates that the aggregate effect of these component changes on the CPI-U All Items index would have increased the percentage change over the period from December 1968 to December 1997 from 354.4 percent to 357.7 percent. Past experience, however, is not necessarily an indicator of the future impact of this policy change.

For additional information on these changes, write to Bureau of Labor Statistics Division of Consumer Prices and Price Indexes 2 Massachusetts Ave. NE, Room 3130 Washington, DC 20212

or send e-mail to Jackman_P@bls.gov, or telephone Patrick Jackman at (202) 606-6950, or obtain the information on the internet at: http://stats.bls.gov/cpihome.htm.

/1 "Measurement Issues in the Consumer Price Index," paper prepared in response to a letter from Representative Jim Saxton, Chairman of the Joint Economic Committee, June 1997. Paper available by contacting BLS or on the internet at: http://stats.bls.gov/cpihome.htm

/2 Paper available by contacting BLS or on the internet at: http://stats.bls.gov/cpihome.htm

Improvements to CPI Procedures for Handling Refunds for Utilities

Effective with the calculation of the index for January 1999, the Consumer Price Index (CPI) will change its treatment of refunds for electricity, natural gas, or other utility services when the refunds are based on earlier periods' utility consumption amounts. The change will affect both the price indexes and the average prices computed by the CPI program.

Under the current practice, the CPI utility indexes reflect refunds that appear on current period bills but that are based on past period utility consumption. Generally these refunds result from the rollback of temporary rate increases, lower than anticipated energy costs, or a reevaluation of rates with respect to actual costs. The current practice makes these indexes rather volatile and do not reflect the actual current price (for example, what a new customer would pay) for a utility service such as electricity.

Under the new procedure, the CPI will disregard any refund for past excess charges when it appears on residential customer bills as a separate refund credit that is subtracted from the charges for current billing period's usage. The movement of the CPI utility indexes will reflect all changes in rates-generally in the month they are effective. The CPI utility indexes will continue to reflect current period credits that are based on current period consumption, such as those associated with purchased gas or fuel adjustments.

For additional information on this change, write to the Bureau of Labor Statistics, Division of Consumer Prices and Price Indexes, 2 Massachusetts Ave. NE, Room 3615, Washington, DC 20212-0001; or telephone Bob Adkins at (202) 606-6985 ext. 264, or send e-mail to Adkins_B@bls.gov

Using a hedonic model to adjust television prices in the Consumer Price Index for changes in quality

Effective with the release of the Consumer Price Index (CPI) for January 1999, the Bureau of Labor Statistics (BLS) will introduce an improvement in the way in which it calculates the Television stratum of the CPI. As of December 1997, Televisions constituted 0.215 percent in the Consumer Price Index for all Urban Consumers (the CPI-U) and 0.256 percent in the Consumer Price Index for Urban Wage Earners and Clerical Workers (the CPI-W). Bureau of Labor Statistics researchers developed a regression procedure, called a hedonic model, that decomposes the price of television sets into implicit prices for each important feature and component /1. This model uses Television observations collected for the CPI and provides an estimate of the value of each of the significant features and components of the sets for which prices are collected. This yields a mechanism for replacing obsolete televisions in the CPI sample with current ones, allowing the CPI to capture the price change that may occur as new models replace old ones in the market place without counting the value of quality improvements as price increases. The CPI has used similar hedonic methods to adjust apparel prices for many years. In January 1998, the CPI began using a similar approach for Personal Computers. In the coming years, BLS plans to extend the method to additional CPI items. Starting with the CPI for January 1999, when a television model in the CPI sample improves in some way, the value of that change, as derived from the regression estimates, will be deducted from the observed price change for that product. (Conversely, if a model deteriorates, the value of the difference will be added to the price.) For additional information on these changes, write to Bureau of Labor Statistics Division of Consumer Prices and Price Indexes 2 Massachusetts Ave. NE, Room 3260 Washington, DC 20212-0001 or telephone Tim LaFleur at (202) 606-6982 ext. 253, or send e-mail to LaFleur_T@bls.gov

/1 Brent R. Moulton, Timothy J. LaFleur, and Karin E. Moses, "Research on Improved Quality Adjustment in the CPI: The Case of Televisions," presented to the Conference of the Ottawa Group, April 1998.

Revision of the CPI Housing Sample and Estimation Process

BLS will implement the housing portion of the ongoing CPI revision process beginning with the index for January 1999. This part of the CPI revision is directed at the major shelter indexes, "rent of primary residence" and "owners' equivalent rent of primary residence." The CPI will shift to an improved estimation method for homeowner shelter costs and will use a new housing unit sample based on the 1990 decennial census.

The new estimator for "owners' equivalent rent of primary residence" will employ the same rental observations that form the basis of the revised "rent of primary residence" index. Those observations will be weighted to reflect the total urban stock of owner-occupied and renter- occupied housing, respectively. The current CPI estimates the change in the implicit rents of a sample of owner-occupied units from the rent change of rental units matched specifically to them. Among other advantages, the new method will not require selection of an owner-occupied sample.

The new sample will provide a current set of rental housing units that, as noted above, will be the basis of both the "rent of primary residence" and "owners' equivalent rent of primary residence" indexes. The decennial census provided information that BLS has used to select small geographic areas (called segments) within the CPI's 87 pricing areas that represent the urban United States. The segment selection process utilizes random sampling so that the housing sample will represent all varieties and locations of the housing stock throughout each CPI pricing area. Segments have been selected for the initial sample. Augmentation segments also will be supplied to replenish the current sample. The CPI will use another sample augmentation process to bring housing units constructed since the decennial census into the CPI housing sample.

Additional information on these and other changes to the housing component of the CPI can be found in the December 1996 Monthly Labor Review article, "Revision of the CPI Housing Sample and Estimators." For additional information, write to the Bureau of Labor Statistics, Division of Consumer Prices and Price Indexes, 2 Massachusetts Ave., NE, Room 3615, Washington, DC 20212-0001 or telephone Frank Ptacek at 202-606-6991 ext. 278, or send e-mail to Ptacek_F@bls.gov

BLS to Maintain Current Reference Base of 1982-84=100 for most CPI index series

The Bureau of Labor Statistics (BLS) previously indicated its intention to change the numerical reference base for both the Consumer Price Index for All Urban Consumers (CPI-U) and the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from their present 1982-84=100 base to a 1993-95=100 base, effective with release of the January 1999 index in February 1999. BLS also indicated that the alternate, or 1967=100 base, would be discontinued in 1999 as well. This plan was initially described in the December 1996 Monthly Labor Review, a publication which contained several articles that dealt with the 1998 CPI Revision.

The BLS has now decided not to implement this rebasing plan. Instead, the BLS will maintain the reference base of 1982-84=100 used for most items. In addition, the 1967=100 reference base will continue to be the alternate base for the All Items indexes. This decision is based in part on the fact that historical data have less precision after rebasing. Rebasing is simply an arithmetic transformation that does not substantially impact the index. Because the rebased index values are smaller, however, the loss of precision due to rounding is more serious. In addition, retaining the old index reference bases would spare users the inconvenience associated with conversion.

Changes in the numerical reference base should not be confused with the updating of the CPI's the market basket. With release of the January CPI in February 1998, the expenditure weights applied to CPI categories are based on consumer spending patterns for 1993-95.

Each year with the release of the January CPI, seasonal adjustment factors are recalculated to reflect price movements from the just-completed calendar year. This routine annual recalculation may result in revisions to seasonally adjusted indexes for the previous 5 years. BLS will make available recalculated seasonally adjusted indexes, as well as recalculated seasonal adjustment factors, for the period January 1994 through December 1998, on Wednesday, February 17, 1999. This date is two working days before the scheduled release of the January 1999 CPI on Friday, February 19, 1999.

The revised indexes and seasonal factors will be available on the Internet. The address is http://stats.bls.gov. Select Data, then select FTP Site, then select special requests, then select cpi. The revised seasonal data will be in the file REVSEAS_1998.CPI.