Q:  The news media has me confused regarding what is included in the CPI.  I understand, according to the media, that the CPI does not include food or fuel.  I wondered how that could be since they would be two of the largest items in the CPI?

A:  Rest assured the Consumer Price Index (CPI) does include food and fuel.  Without those two items, the CPI would grow much more slowly than it already does and so would your annual-cost-of-living adjustment (COLA).

Because food and fuel prices are highly volatile —subject to international crisis, wars, and disasters — Wall Street economists often exclude those costs in news reports in order to give the business community a better idea about the status of “core inflation.”  If less volatile items remain relatively unchanged, that tends to indicate that inflation remains stable, despite spikes in oil or food prices — a reassurance to the markets.
Of concern to Social Security recipients, however, are not only what categories and items are included in the CPI, but also whose market basket the government is surveying, and the fairness of the “weight” or estimate of the portion of income they represent that the Bureau of Labor Statistics assigns.

When Congress enacted automatic Social Security COLAs in 1972, there was only one CPI and it measured the inflation experienced by urban wage earners and clerical workers (CPI-W).  The 1972 amendments used this CPI as the basis for determining your COLA today.  But today there are other, more appropriate indexes for calculating the COLA.  In 1978 the Bureau of Labor Statistics (BLS) expanded the CPI known as the CPI-U to cover all urban residents, including most retirees, and in 1983 the BLS launched an experimental index, the Consumer Price Index for the Elderly (CPI-E), which reflects the spending patterns of people age 62 and older.

The big difference between the CPI-W used to calculate your COLA, and the CPI-E, is the weight or portion of income that the Bureau of Labor Statistics gives to each category.  While seniors occasionally benefit from the heavier weighting of transportation costs and food costs under the CPI-W when food and gasoline prices spike, in the majority of years they fall behind due to the lower weighting of medical care.

How the Categories Compare Between the CPI-W and the CPI-E

TSCL is working with Members of Congress for the “Guaranteed 3% COLA for Seniors Act, (H.R. 776) introduced by Representative Eliot Engel (NY-17).  The bill directs the Bureau of Labor Statistics to prepare and publish a monthly CPI-E and uses it to calculate the annual Social Security COLA.  And in the case when inflation is low, the bill would provide an annual COLA of at least 3%.

Sources:  “Should Social Security’s Cost-of Living Adjustment Be Changed?” National Academy of Social Insurance, April 2011.

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