Change in CPI calculation weighed Report: More precise reading of government's key inflation measure could solve problem of incorrect percentage change being reported. NEW YORK (CNNMoney.com) -- A more precise measure of the Consumer Price Index could be instituted next year, according to a published report Monday, a move that could see the closely watched inflation reading roil markets less. The Wall Street Journal reports that the Bureau of Labor Statistics, which compiles the federal government's key inflation measure, is considering reporting the index and its subindexes to three decimal places instead of one. The indexes are rarely reported in media accounts of the index, but that is how the percentage change is determined. But because the indexes are themselves rounded to only one-tenth of a point, the percentage change can sometimes be incorrect. For example, a if the index for one month is 198.945, and it moves up to 199.355, the actual change is 0.206 percent, which rounds down to 0.2 percent. But when the BLS rounds the initial month's index down to 198.9, and the index for the next month up to 199.4, that produces a 0.3 percent rise. Such an inaccurate reading occurred in the February 2005, the paper reported, when economists were forecasting a 0.2 percent rise in the so called core CPI, which strips out food and energy prices. The BLS reported a 0.3 percent rise in the closely watched core reading, but extending the index readings out to three decimals would have resulted in the expected 0.2 rise. The paper said that a study by the BLS shows that between 1986 to 2005, about three times a year the overall CPI reading has such a incorrect percentage change reported, and two times a year, the less volatile core CPI has an incorrect core number reported. Incorrect readings would be reduced to 1 percent if three decimals are used, according to the Journal. "Increasing the precision of reported CPI levels would go a long way toward making the errors which arise from rounding error negligible," wrote Elliot Williams, the author of the BLS working paper. The next CPI report is due to be released Wednesday. |
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