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October 2006, Vol. 129, No. 10
The effects of rounding on the Consumer Price Index
The Bureau of Labor Statistics (BLS, the Bureau) rounds the Consumer Price Index (CPI) to a single decimal place before it is publicly released. In 1984, the index was rebased to 100.0, and it stands near 200 today. Because the index value is so large, one might think that the difference between, for instance, a CPI of 189.7 and a CPI of 189.72 would be negligible. However, it is not negligible for the percent change between two CPI values, or CPI inflation. Because the actual changes in the CPI have been quite small recently (the rate of inflation has been relatively low), the small differences incurred in rounding up or down can create a misleading picture of monthly price inflation.
And that difference matters in the economy. For example, this Reuters news article is representative of the impact that the release of the February 2005 index value had, signaling a surprisingly large increase in the rate of inflation to financial markets:
The core CPI, which strips out volatile food and energy costs, rose 0.3 percent. It was the biggest rise in the core rate since September and broke a string of four straight 0.2 percent gains.
Wall Street economists had braced for a milder 0.3 percent rise in overall consumer prices and had expected another 0.2 percent gain outside food and energy.
The report added to financial market inflation jitters and increased speculation [that] the Federal Reserve, which raised credit costs on Tuesday, might step up the pace of its rate rise to keep inflation under wraps.1
This excerpt is from an article published in the October 2006 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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1 "Consumer Prices Jump, Spur Inflation Woes," Reuters, Mar. 24, 2005.
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