CPI Changes Considered

The Bureau of Labor Statistics is part of the Department of Labor, and it is in charge of various economic measurements, including the Consumer Price Index. The CPI is a reasonable measure of the rate of inflation as experienced by the average American. It isn’t the best possible measure (the Producer Price Index is a better window to the future), but it is part of the set of numbers Wall Street and others watch. The BLS is considering changes to the CPI that will improve its accuracy, and may it do so quickly.

The change is a simple one and has nothing to do with weighting this versus that, measuring more frequently or broadly. Simply, the BLS is going to carry its calculations out to three decimal places. This eliminates rounding errors, and the CPI becomes more accurate, thus more useful.

According to an article by Greg Ip in the Wall Street Journal, “an increase of 0.249% would be rounded down to 0.2%, while an increase of 0.251% would be rounded up to 0.3%. The difference between 0.2% and 0.3% seems large, but without rounding the difference is trivial.” Mr. Ip also reports that the BLS also rounds the CPI and its subindices before publishing them.

Suppose the index for one months is 198.945 and then rounded down to 198.9, and the index for the next month is 199.355, and then rounded up to 199.4. The change in the rounded numbers is 0.251% which rounds up to 0.3%, but the change in the unrounded numbers is only 0.206%, which rounds down to 0.2%.

The difference between 0.2% and 0.3% can have a huge impact on the market.