Summary: One of the most important economic indexes produced by the federal government is the consumer price index (CPI). Last year, nearly $500 billion in federal spending, such as checks to Social Security recipients, was tied to price changes measured by the CPI. The CPI is also used each year to adjust for inflation various aspects of the federal income tax, from tax brackets to personal exemptions. As a result, nearly every American is affected by changes in the CPI. The CPI tracks the prices of a fixed market basket of goods and services that consumers buy. The market basket contains thousands of different products and services, and the Bureau of Labor Statistics (BLS)--which publishes the index--tries to obtain prices on the exact same items each month. Sometimes, however, BLS cannot find the exact same items. When this happens, BLS price takers in the field "substitute" a new version of the product for the old one. If BLS' commodity analysts later decide that there are significant differences between the items and their substitutes, they make what BLS calls "quality adjustments" to separate pure price changes from price changes that are due to other factors, such as differences in quality, size, or quantity. Evidence exists that substitutions have a significant impact on the CPI. This report describes (1) how commodity analysts decide whether to make adjustments, (2) the adjustment methods they use, and (3) how supervisors of commodity analysts review the analysts' decisions.
