What Is Chain-Weighted CPI?

The chain-weighted Consumer Price Index (CPI) ꦺis an alternative to the standard index that takes into account changes in consumer spending patterns to provide a more accurate picture of the real cost of living.

The chain-weighted CPI takes more time♕ to compile and revise and thus the data are less timely. However, it is w👍idely seen as a more accurate cost-of-living index.

Understanding Chain-Weighted CPI

The monthly chain-weighted CPI accounts for changes in consumer preferences and📖 the product substitutions they maℱke due to changes in relative prices.

This metric is considered more accurate than the traditional fixed-weighted CPI. Rather than focusing on a fixed basket of goods, chained CPI is adjusted based on thꦅe mix of goods that consumers b♎uy

These adjustments also make the chain-weighted CPI a less timely indicator and a less accurate measure of 澳洲幸运5开奖号码历史查询:inflation.

The 澳洲幸运5开奖号码历史查询:Bureau of Labor Statistics (BLS) publishes the chain-weighted CPI monthly along with its other regular reports on prices and inflation. CPI-U and other similar indexes are calculated by collecting the prices of a basket of consumer goods held relatively constant in its compositi𝓰on and weighting each month. Updates are made only every few years.

The basket of consumer goods used to calculate chained CPI is updated montꦫhly to reflect the mix of go🐠ods that consumers bought that month.

These adjustmಞents are meant to💙 account for two factors that a fixed-basket CPI ignores:

1. Consumer preferences for goods change over time and the type and quality of goods available usually improve as technology advances. By adding newly introduced goods and adjusting the weight of existing goods to better map the patterns of consumer spending on different types of goods, the chained CPI captures these effects.
2. Consumers tend to adjust their buying behavior within and across categories of goods based on price changes. When the price of ground beef relative to chicken rises, consumers buy more chicken and less beef. This is called the 澳洲幸运5开奖号码历史查询:substitution effect. Because consumers substitute, the actual cost of their purchases tends to be more stable than a price index of a fixed basket of goods with a fixed weight would imply.

Th🌞is chained CPI has one drawback in comparison to the standard model. These adjustments take more time and rely on estimates that have to be updated and revised later. Thus, chain-weighted CPI is a much less timely indicator than regular CPI.

Monthly chain-weighted CPI numbers are updated and 🌟revised retroactively each month, with a final index number published 12 months after the fact. This makes it less useful as 🦩a real-time indicator of the cost of living. Regular CPI is considered to be the final estimate for each month that it is published.

Special Considerations

Though chained CPI may be a better indicator of the cost of living, it is a poorer indicator of inflation or the decline in consumer✤ purchasing power over time.

Changing the composition and weighting of the basket of goods sabotages the index's usefulness for measuring any decline in 澳洲幸运5开奖号码历史查询:purchasing power. Despite this, chain-weighted CPI is often usedღ to be 🐼a measure of inflation.

The effect over time of chain-weighted CPI adjustments is to show a slower rate of increase in the cost of living compared to regular C𝄹PI. This may be considered a feature or🌟 a drawback depending on the interests and incentives of the person reporting and using the index.

From the government's point of view, using chain-weighted CPI rather than regular CPI to make cost-of-living adjustments to public benefits payments results in lower payments to beneficiaries. Its use in setting tax brackets, however, results in higher effective tax rates as upward adjustments to the brackets are delayed.

Chain-Weighted CPI and Taxation

A U.S. federal law passed in 2017 applied the chain-weighted CPI instead of the primary CPI for adjusting the incremental increases in income 澳洲幸运5开奖号码历史查询:tax brackets. By switching to this metric, the increases to tax bracket adjustments will be co꧃mparatively smaller each year.

This move to chain-weighted CPI is expected to push more citizens into higher tax brackets over time, thereby in𒁏creasing the taxes they owe.

For taxpayers whose salary increases are indexed to primary💖 CPI, this change may eventually result in them paying more tax in a higher bracket despi🅘te not feeling significantly wealthier. As inflation accelerates this effect will become more pronounced, meaning that more taxpayers will begin feeling the bite of higher taxes in addition to paying more for the goods and services they buy.

Example of Chain-Weighted CPI

Consider the imp𝓰act of two similar and substitutable products—♛beef and chicken—in the shopping basket of a typical consumer, Ms. Smith. She buys two pounds of sirloin at $12 per pound and two pounds of chicken at $4 per pound.

A year later, the price of sirloin rises to $14 per pound while the price of chicken increases to $5 per pound. While both prices have risen, the price of beef relative to the price of chic🏅𝕴ken is higher.

Ms. Smith, therefore, adjusts her spending pattern, buying more chicken and less beef to cushion tꦑhe impact that the rise in prices will have on her household budget.

The Bottom Line

Prices dictate how consumers spend their money. They also help governments calculate inflation and determine mon𓃲etary policy. Prices are often compiled in an index known as the Consumer Price Index.

An alternative🔯 to this measure is chain-weighted CPI, which factors in changes in consumer spending. It is considered a more accurate gauge of the cost of living than other forms of CPI because it adjusts based on what consumers buy rather than the prices for a fixed basket of goods.