The purpose of the AIER’s Everyday Price Index (EPI) is to measure changes in the prices of goods and services that are important to people’s everyday lives. The index reflects the price uncertainty (i.e. unexpected and unavoidable price changes) that people face with purchases they cannot easily adjust from one month to the next.
The EPI tracks a subset of prices from the broader Consumer Price Index (CPI) reported by the Bureau of Labor Statistics (BLS). The CPI includes prices of all goods and services purchased by a typical urban consumer. The EPI, in contrast, includes only goods and services purchased on a day-to-day basis that cannot be easily postponed or foregone.
These include everyday items such as food, utilities, fuel, prescription drugs, telephone services, etc. The EPI excludes infrequently purchased items, such as cars, appliances, furniture, or apparel. Purchases of such products can be planned for or postponed, eliminating unexpected shocks to household budgets. The EPI also excludes the cost of housing, which can be contractually fixed for at least several months (in the case of rents) or several decades (in the case of mortgage payments). Even a dramatic change in home prices does not translate into an immediate jump in rents or mortgage payments the way, say, an oil price increase translates into higher gasoline prices.
The EPI is constructed from price series that are not seasonally adjusted. Therefore, the index reflects the prices actually paid by consumers every month.
An important word of caution: The EPI should not be interpreted as an improved inflation measure. Rather, it follows prices that are more relevant to families’ everyday planning.
As captured by the EPI, everyday prices show a trend different from the overall inflation reflected in the CPI. For more information and a discussion of the forces driving the divergence between the everyday prices and the CPI, see “Capturing shifts in everyday prices” in our Issue Briefs.
Constructing the EPI
The EPI is constructed using the same data the BLS uses for the more widely known CPI.
The first step is to select the categories of goods and services that are judged to be everyday expenditures, which we define as meeting both of the following two criteria:
- High-frequency purchases – goods or services that, if they are purchased at all, are purchased at least once a month.
- Goods and services whose prices are not contractually fixed – there is no option to pre-set the price of the product or service for at least six months.
Goods and services that meet both of these criteria are included in the EPI; those that fail at least one criterion are not.
The components of the EPI are:
- Food-at-home, food-away-from-home, alcoholic beverages.
- Household fuels and utilities, housekeeping supplies, domestic services, gardening and lawn care.
- Motor fuel, intracity public transportation.
- Prescription drugs, nonprescription drugs, vitamins.
- Cable and satellite TV and radio service; video discs and other media, including rental of video and audio; audio discs, tapes, and other media; admissions (to movies, theaters, concerts, sporting events); fees for recreational lessons and instructions; recreational reading materials (newspapers, magazines, books); pets and pet products.
- Postage and delivery services, telephone services, Internet services and electronic information providers.
- Tobacco and smoking products.
- Personal-care products and personal care services.
The current components and weightings of the EPI can be seen in each monthly publication of the index value.
A change in the EPI is computed as the weighted average of the price changes of its components. We weight each component by the expenditure share devoted to it. These weights are identical to the ones the BLS uses in constructing the CPI, which are derived from the Consumer Expenditure Survey conducted by the BLS. This means that the EPI assumes the same consumer expenditure patterns as the CPI.
Expenditure patterns evolve over time, reflecting changing preferences and the introduction of new products. To account for this, the BLS updates the Consumer Expenditure Survey annually and introduces new weights for the CPI. The EPI incorporates these weights.
Prices change, even if purchasing preferences don’t. A sharp increase in the price of gasoline would cause gas to take up a larger portion of family budgets. This increases the “relative importance” in BLS terminology, of gasoline among all products included in the EPI.
To account for these effects, the BLS adjusts the weight for all components of the CPI every month. We do the same for the EPI to keep the methodology behind the EPI and the CPI fully consistent.
It should be noted that this does not make the EPI a chain-weighted index. A chain-weighted index, such as a chained CPI, uses contemporaneous monthly expenditure estimates to create weights for each category, thus capturing the effect of people reacting to rising prices by possibly switching to cheaper, substitute products. To do so, monthly expenditure data are required. Our EPI methodology, identical to that of the not chain-weighted CPI, does not rely on monthly expenditure estimates. Instead, we update the weights each month based only on the change in prices, implicitly assuming that no substitution between products takes place.
The majority of the series included in the EPI are not adjusted for the changing quality of goods and services. The quality of items such as food, gasoline, or toothpaste does not change much over time. A few series, such as cable TV and telephone services, can potentially have a quality adjustment applied to them. Such components account for less than 20 percent of the EPI. Therefore, the effect of quality adjustment on the EPI is much smaller than on the CPI.
More information, including the full technical description of the EPI computation can be found in AIER working paper “Capturing the Inflation that People Experience: The Everyday Price Index versus the Consumer Price Index,” AIER Working Paper 004.
Monthly updates are here. AIER’s Everyday Price Index is also available on Bloomberg under the following symbol: AIEREPIN Index