The Index Is Misleading & Incomplete

THE COST OF LIVING

ONE of the most frequently cited U.S. economic statistics is the Consumer Price Index, commonly (and erroneously) referred to as the cost-of-living index. Some 4,000,000 workers have their wage rates tied directly to the index, and the wages of the other 17 million in manufacturing and transportation are indirectly affected by the competition for manpower. Says Ewan Clague, commissioner of the U.S. Bureau of Labor Statistics, which prepares the index: "A single point increase can run up wages in the U.S. by $160 million. So much money changes hands that you have to have high standards of accuracy."

But there is a growing suspicion among economists and businessmen that the accuracy of the index leaves a lot to be desired. In the first place, the index is not supposed to be a true measure of the cost of living. As the Bureau of Labor Statistics points out, it is only a measure of what families in the under-$10,000-a-year bracket, living chiefly in cities, pay for the "market basket" of 300 goods and services that such representative families presumably buy. The index shows the price increase since 1947-49, the base year, but no economist regards it as reliable except for the short run.

Over the long range, the index cannot be an accurate indication of the cost of living because family buying habits change. BLS tries to revise the index to take such changes into consideration, and since the modern index was developed 22 years ago, a score of the 200 original items have been dropped and more than 100 added. But it is almost impossible to make completely satisfactory substitutions. In the '30s, BLS sampled prices for kerosene (for cooking), ice and one-piece union suits, all among the items since dropped. It did not include tablecloths, draperies, bedspreads, baby foods, facial tissues and shampoos, among scores of items since added. And no real study has been made since 1952 to find out whether the 300 goods and services still account for the same relative shares of family spending as BLS decided they then did.

Until the '50s, BLS also assumed that most of its families were renters. It now checks prices of new houses, interest rates on mortgages and home improvements. But it ignores the do-it-yourself trend, assumes that labor is hired at union wages to paint the dining room, sand the floors or reshingle the roof. Other changes in the index do not reflect higher prices, but higher standards of living. The index now includes dinners out, hotel and motel rates on vacation trips, the expense of keeping more informal clothes (in addition to work clothes and Sunday best), plus outlay for sports equipment, whisky and even from time to time a lawyer to look after the family's property. It also samples prices for late-model used cars, such as many families now keep for a second car, and is giving serious thought to adding power tools, home freezers, air conditioners, outboard motors and pleasure boats to the television sets that it already counts as necessities.

BLS officials stoutly defend all such revisions. Unless the index is kept up to date, they say, the list would soon be heavily loaded with items nobody buys. But the real trouble is that such changes are interpreted as price increases instead of being identified for what they are: major upward shifts in living standards.

Even on the narrow issue of measuring prices, the index is vulnerable. Food costs make up 30.1% of the market basket, but BLS does not check food stores on weekends, when most stores run their big sales and do most of their selling. BLS prices appliances in department stores, but not in discount houses, contends that discount prices are not really savings because they do not include delivery or service, although many discount houses now provide both. It asks auto dealers for an estimated selling price, does not check the deals that hard-bargaining buyers actually get.

The whole field of quality improvement is also outside BLS's reporting system. Today's new Ford, Chevrolet and Plymouth (the makes BLS samples) are superior in performance and durability to higher-priced cars of only a few years ago. But BLS makes no allowance for the fact.

Despite the index's flaws, the Bureau of Labor Statistics gets little support from Congress in trying to improve it. Only this year BLS tried to resume spot checks in several cities on actual consumer expenditures to see how representative its market basket is. But Congress refused to appropriate the trifling $115,000 needed. Doing his best with the tools Congress allows him, Commissioner Clague is considering asking Congress for funds to revise the index completely. Many economists believe that such an expenditure would be justified, so that BLS can find out exactly how U.S. families spend their money, thus not confuse the cost of living with the cost of better living.

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