# The Experimental CPI Using Geometric Means

An experimental Consumer Price Index (CPI) for All Urban Consumers, using a geometric mean formula to combine individual price quotations at the lower level of aggregation while keeping the current Laspeyres arithmetic mean formula for higher level aggregation, is being introduced by the Bureau of Labor Statistics, U.S. Department of Labor. This experimental index, called the experimental CPI using geometric means, or CPI­U­XG, is a supplement to the price information available from BLS and does not replace the published CPI­U or CPI­W indexes. BLS currently is evaluating the full or partial adoption of the geometric mean formula in the CPI­U and CPI­W.

The current CPI, which is calculated using a fixed-weight Laspeyres formula, does not reflect the fact that consumers can and do change spending patterns as relative prices change. Under certain assumptions, a measure of change in consumer prices that uses a geometric mean formula will successfully account for this consumer behavior. To the extent that those assumptions are accurate, the index using geometric means will provide a closer approximation to a cost-of-living index.

Each month in the CPI, prices of individual items are averaged together to produce indexes for 9,108 item-area categories. It is at this first or lower level where the CPI­U­XG uses geometric means instead of the Laspeyres method (arithmetic means) in the estimation of price relatives. At the second or upper level, these basic indexes are combined to produce the All Items CPI as well as major group and other intermediate indexes. In both the official CPI­U and the CPI­U­XG, basic indexes are aggregated at the upper level using the arithmetic means and not geometric means.

The CPI­U­XG indexes are available for the period from December 1990 through February 1997 and will be issued in the future according to the schedule set out below. Historical differences between the CPI­U and CPI­U­XG arise not only because of the different formulas used, but also because of methodological changes made in the CPI­U since 1990 that are reflected in the CPI­U­XG for the entire series. For historical comparison to the CPI­U­XG, therefore, BLS also is issuing an experimental Test Laspeyres series called the CPI­U­XL, which differs from the CPI­U­XG only in the use of the Laspeyres formula for aggregation of price quotations.

Over the period from December 1990 to February 1997, the CPI­U­XG rose 16.2 percent, compared with 18.6 percent for the CPI­U­XL. The average annual rate of growth in the CPI­U­XG over this period was 2.46 percent, 0.34 percentage points lower than the 2.80 percent annual growth rate of the CPI­U­XL. Among major item groups, the largest differences between the two indexes were in food and beverages, apparel and upkeep, medical care, and entertainment.

The January 1995 methodological changes in the CPI treatment of food at home appear to have reduced the difference between the CPI­U­XG and CPI­U­XL. We expect to observe a further narrowing of the gap as a result of additional changes made in June and July of 1996.

Beginning on April 22, the Geometric Mean and Test Laspeyres indexes will be released monthly one week after release of the CPI­U. These series will not require special embargo procedures and are expected to be available at approximately 8:30 a.m. on the morning of their release.

Each month, the most recent data will be added to the historical tables for the National All-Items, Major Groups, and Special Indexes (food, energy, and all items less food and energy) that are available on the Internet at http://www.bls.gov/cpi/. This information also can be obtained from the Consumer Price Index information staff at (202) 606-7000. Indexes will be included quarterly in the CPI Detailed Report, beginning with publication of first-quarter 1997 CPI-U-XG data in the April Detailed Report. The CPI­U­XG and CPI­U­XL will not be available on a seasonally adjusted basis. Calculation and publication of the CPI­U­XL will be discontinued after December 1997, because that index is primarily of value for historical comparisons.

The relative movements in the CPI­U­XG will be studied as part of a BLS research program to evaluate, item category by item category, adoption of the geometric mean formula in all or some components of the official CPI. Scanner data, studies of substitutions between brands, and other information will be used to assess the propensity of consumers to substitute across items within individual item categories as the relative prices of those items change.

By the end of 1997, BLS will announce the findings of its research, including its determination of which CPI basic indexes are best calculated with the geometric mean formula and when the implementation of any change will take place. The likely date for that implementation is with the release of January 1999 CPI data.

BLS's best estimate is that use of the geometric mean formula in all CPI basic indexes would lower the growth rate of the index by approximately one-quarter of one percent per year. Partial adoption of the geometric mean formula would be expected to have a downward impact of between zero and one-quarter of one percent per year, depending on how many, and which, indexes continue to be based on the Laspeyres approach.

For current CPI­U­XG and CPI­U­XL data, or for further information, write to the Bureau of Labor Statistics, Division of Consumer Prices and Price Indexes, Room 3615, 2 Massachusetts Ave., NE, Washington, DC 20212-0001, or call Kenneth J. Stewart at (202) 606-7000.