Measuring how much Americans spend on household expenses can be difficult

Since the days of the American Revolution, people have been moaning about the high cost of living. However, measuring it and identifying how it changes over time has always been difficult. Only a century ago, in 1921, the United States government began releasing a nationwide Consumer Price Index (CPI) based on living costs in major cities.

The CPI is still the most commonly referenced indicator of living costs today, providing a record of how costs have changed from year to year as well as abundant proof for those who lament that few goods are as inexpensive as they once were. It is also utilized as a proxy for inflation in revising union wages, Social Security payments, income tax brackets, and other financial computations that are important in the lives of Americans.

 

The Evolution of Living-Cost Measures

The Bureau of Labor Statistics (BLS) began collecting statistics on Americans' cost of living shortly after its establishment by Congress in 1884. It tracked how much money 8,544 families spent each year in the late 1880s, as well as the current retail prices for 215 commodities.

BLS data collecting got more sophisticated in its statistical methodologies and more ambitious in its magnitude throughout time. The findings were frequently utilized to assist determine wage increases in labor conflicts between businesses and unions. Workers, at least according to unions and their members, deserved a living wage for their efforts.

 

The CPI's Early Years

The CPI as we know it began during World War I, when the Shipbuilding Labor Adjustment Board used BLS statistics to determine a fair wage scale for workers in United States shipyards. Because their labor was so vital to the war effort, the government did not want to risk any protests or work stoppages for increased pay. Before long, the BLS had broadened its scope, collecting data on household spending for 12,000 families in cities around the country, as well as the prices of more than 140 items and services. The BLS started publishing the data in 1919 and published it in a format close to today's CPI in 1921.

 In its early days, it was known as the Cost-of-Living Index. It was renamed the Consumers' Price Index for Middle-Income Families in Large Cities in 1945, and was quickly abbreviated to the Consumer Price Index. The CPI has evolved over time as the country and its political winds have altered. During World War II, for example, the BLS removed new-vehicle and home appliance prices from the equation because neither was readily accessible, and instead raised the weighting given to car repair and mass-transit expenditures.

It incorporated the new wonders of frozen meals and television sets to its price lists in the 1950s. It expanded its data collecting to include single-person families in the 1960s. It also made various changes to its weightings and other technical specifications.

 

The New Consumer Price Index for All Urban Consumers (CPI-U)

The Bureau of Labor Statistics introduced the CPI for All Urban Consumers, or CPI-U, in 1978, and renamed the existing CPI for Urban Wage Earners and Clerical Workers, or CPI-W. The new CPI-U is meant to be more indicative of the majority of Americans' living costs. The BLS introduced the Chained Consumer Price Index for All Urban Consumers, or C-CPI-U, in 2002.

It differs from other CPIs in that it takes into account changes in what consumers put in their shopping baskets as particular commodity prices rise or fall. If beef becomes more expensive, buyers may purchase more fish or chicken, and vice versa.

 

The Elderly Consumer Price Index Experiment (CPI-E)

Along the way, the BLS began to build another CPI, the Experimental Consumer Price Index for the Elderly (CPI-E), and began publishing statistics for it as early as 1982. It is intended to measure the living costs of Americans aged 62 and older, and it employs various weightings to account for, for example, that group's greater medical costs. However, due to data restrictions, the BLS still deems it experimental.

 

Complaints about the Consumer Price Index (CPI)

Many of the CPI's modifications have been prompted by concerns of its methods and accuracy as a measure of inflation. These criticisms are still leveled today.

As the BLS admits, the CPI is frequently chastised for failing to reflect the experiences of certain population groups. Also, as trendy new products hit the market, the list of items that customers spend their money on can lag behind what they actually buy. And, while the CPI may do a fair job of representing the aggregate experience of Americans, it might be completely off for any specific individual. "Those consumers whose market baskets differ from the average basket would almost certainly experience inflation that differs from the CPI measure," the BLS stated in 2012. "In recent years, someone who spent a lot of money on gasoline and medical care suffered far more inflation than someone who spent a lot of money on furniture, clothing, and technology."

Not surprisingly, some detractors claim that the CPI exaggerates inflation, while others argue the contrary.

 

The Impact of the Consumer Price Index (CPI) on You

Whatever its limitations, the CPI is important in the lives of many Americans. Collective bargaining agreements, for example, frequently incorporate cost-of-living adjustments (COLAs) based on the CPI. Employers with non unionized employees may also use the CPI to determine their own wage hikes.

Each year, Social Security and Supplemental Security Income (SSI) beneficiaries are entitled to an increase in their payments based on any increase in the CPI-W from the previous year. If the CPI-W does not rise, as it did in 2016, they will receive no increase. The projected growth for 2023 is 8.7%.

The CPI might also have an impact on how your income is taxed. The Internal Revenue Service (IRS), for example, alters marginal income tax brackets each year in response to changes in the chained CPI.

However, not every government agency utilizes a CPI to estimate inflation. For example, the Federal Reserve Board uses the Personal Consumption Expenditures (PCE) Price Index, an alternate measure created by the Commerce Department's Bureau of Economic Analysis that it considers to be more accurate for its purposes.

Those who wish to learn more about the cost of living and other financial concerns might consider taking one of the best personal finance classes.

 

Household Income and Consumer Prices

While the CPI is a role in determining many Americans' incomes, it is far from the only one. According to our findings, both consumer prices and household incomes rise over time, although not in lockstep.

The CPI, as shown in the top graph below, tends to climb at a fairly steady rate over time (although the inflation-wracked 1970s accelerated the curve, as the graph also makes clear). However, as shown in the second graph, household income follows a more erratic pattern, even dropping for extended periods of time, such as during recessions.

Furthermore, even seemingly minor annual increases in the cost of living can build up over time, much like compound interest. For example, the CPI-U climbed at a relatively slow pace during the 2010s, with an average growth of 1.4% each year. Nonetheless, the BLS' CPI Inflation Calculator reveals that $100 in January 2010 was equivalent to $118.59 in purchasing power at the end of 2019.

 

Are Americans losing ground?

Many Americans' personal experiences indicate that earnings have not kept pace with rising living costs in recent decades. The evidence, on the other hand, is more complicated. According to a Pew Research Center analysis from 2018, "today's real average wage (that is, the wage after inflation) has roughly the same purchasing power as it did 40 years ago." However, according to the research, "any wage rises there have been primarily moved to the highest-paid tier of workers."

That salaries have more or less maintained pace with inflation is not always good news, especially in a country that has long prided itself on being a land of opportunity, where hard workers can expect to see their standard of living increase over time. Wage stagnation is what economists call it.

Wage growth has been slow for Americans at the bottom of the economic pyramid, a situation now known as income inequality. Workers earning the minimum wage have been disproportionately harmed. Some states tie the minimum wage to the Consumer Price Index, while others leave it up to legislators to decide whether increases are warranted. The federal government takes the latter approach, and raising the minimum wage is a political hot potato.

Because the federal government has been hesitant to boost the minimum wage, some workers' inflation-adjusted earnings have fallen significantly. According to the most recent data, the federal minimum wage of $7.25 in 2022 was worth 18% less than when it was last hiked in 2009, after correcting for inflation.

In 1968, the average minimum wage worker earned $10.59 per hour after inflation, which is 46% more than employees make now. "If the minimum wage had mirrored productivity improvements over the last five decades, it would be more than $22 per hour now." So, while many Americans grumble about the rising cost of living, some have more cause for concern than others.

 

What Is the 2023 Cost of Living Increase?

The cost-of-living adjustment for Social Security and Supplemental Security Income (SSI) recipients in 2023 was 8.7%, the biggest increase in 40 years, reflecting the rise in consumer prices.

 

What are the states with the lowest cost of living?

A 2022 Credit Karma study looked at the cost of living in the United States and discovered that the cheapest places to live were, in order, Oklahoma, Alabama, Mississippi, Missouri, and Arkansas. The study examined several aspects, including home values, average rent, taxes, and general cost of living.

 

What Exactly Is Income Inequality?

Income inequality is defined as an unequal distribution of income across a population. The larger the disparity in income distribution, the greater the income inequality. Income inequality is frequently associated with wealth inequality.