The US Bureau of Labor Statistics calculates inflation by taking samples of pric

Question

The US Bureau of Labor Statistics calculates inflation by taking samples of prices for a “basket of goods and services” a “typical consumer” would purchase. Each good and service is assigned a “weight” or percentage of income spent on that product. For example, “cakes, cupcakes, and cookies” are given a weight of 0.197. This means that about 0.2% of the “average” household spending is made on these items. Of course, an individual’s spending may vary significantly from the hypothetical basket of goods and services. In this assignment, you will review the BLS’s “Relative importance of components in the Consumer Price Indexes” and compare how your household spending measures up to the “typical consumer’s.”

Part I

Consider these specific categories:

Category

CPI Weight

Your Budget

Health Insurance

0.5

Jewelry

0.3

Household Cleaning Supplies

0.4

Gasoline

4.9

Food Away from Home

5.9

How closely does your household spending correlate to the “typical consumer’s”? Is it realistic that the “typical household” spends about as much in health insurance as it does in cleaning supplies? Should the Bureau of Labor Statistics adjust its CPI weights after the new federal health care mandate starts? What might this mandate do to inflation? In an economic contraction, what would you expect to happen to spending in each of these categories, if health insurance is mandated?

Category

CPI Weight

Your Budget

Health Insurance

0.5

Jewelry

0.3

Household Cleaning Supplies

0.4

Gasoline

4.9

Food Away from Home

5.9

Explanation / Answer

For me, the CPI allocation will be as follows:

So, my household spending is poorly correlated with the typical consumer's spending.

It is not a realistic fact that a typical household should spend as much on cleaning supplies, as in health insurance which is much more expensive. This is possiblle for Statistical outliers - households who are hygiene freaks or extremely health conscious. Or, a household where a member has some medical problem, like dust allergy, pollen or fur allergy, where cleanliness is extremely crucial.

The new healthcare mandate requires most people to have either medical insurance, or pay a penalty in form of tax. Therefore, it is expected that CPI weights should be adjusted - to pay for mandatory healthcare insurance (or the tax, failing that), public should re-shuffle their consumption basket to accommodate this additional expense.

This mandate, however, may reduce inflation. Demand for non-healthcare goods and services are expected to decrease (assuming income level remains unchanged), resulting in lower overall price level.

If health insurance is mandated, then during contraction (when income levels are low and/or uncertain), spending in other categories are likely to decrease, since people should consume less and save more, anticipating any cash shortage but not risking failure to pay for the healthcare insurance.

CPI Weight My Budget Health Insurance 0.5 2 Jewelry 0.3 0 Household Cleaning 0.4 0.5 Gasoline 4.9 12 Food Away from home 5.9 8

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