Effective altruism

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https://en.wikipedia.org/wiki/Effective_altruism 

 

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Effective altruism (EA) is a philosophical and social movement that advocates "using evidence and reason to figure out how to benefit others as much as possible, and taking action on that basis". People who pursue the goals of effective altruism are labeled effective altruists.

Common practices of effective altruists include significant charitable donation, and choosing careers based on the amount of good that the career achieves, which may include the strategy of earning to give. An estimated $416 million was donated to effective charities identified by the movement in 2019, representing a 37% annual growth rate since 2015. Famous philanthropists influenced by effective altruism include Bill and Melinda Gates, Warren Buffett, Elon Musk, Sam Bankman-Fried, Peter Thiel, Dan Smith, and Liv Boeree.

Prominent cause priorities within effective altruism include global poverty, animal welfare, and risks to the survival of humanity over the long-term future.

The philosophy of effective altruism applies more broadly to the process of prioritizing the scientific projects, companies, and policy initiatives that can be estimated to save lives or otherwise improve well-being. Philosophical principles of effective altruism emphasize impartiality, cause neutrality, cost-effectiveness, and counterfactual reasoning. One prominent philosophical debate is about how effective altruism relates to institutional or structural change.

The movement developed during the decade of the 2000s, and the name effective altruism was coined in 2011. Several books and many articles about the movement have since been published, and the Effective Altruism Global conference has been held since 2013.

Practice

People practice effective altruism in different ways, such as donating to organizations like Deworm the World, using their career to make more money for donations or directly contributing their labor, and starting new non-profit or for-profit ventures. For example, Michael Kremer and Rachel Glennerster conducted many randomized controlled trials in Kenya to find out the best way to improve students' test scores. They tried new textbooks and flip charts, as well as smaller class sizes, but found that the only intervention that raised school attendance was treating intestinal worms in children. Based on their findings, they started the Deworm the World Initiative, which is rated by GiveWell as one of the best charities in the world for cost-effectiveness.

Donation

An aristocratic woman giving alms

Many effective altruists engage in significant charitable donation. Some believe it is a moral duty to alleviate suffering through donations if other possible uses of those funds do not offer comparable benefits to oneself, and some lead a frugal lifestyle in order to give more.

Giving What We Can (GWWC) is an organization whose members have pledged to donate at least 10% of their future income to the causes that they believe are the most effective. GWWC was founded in 2009 by Toby Ord, a moral philosopher, who lives on £18,000 ($27,000) per year and donates the balance of his income. In 2020, Ord said that people had donated over $100 million to date through the GWWC pledge.

Founders Pledge is a similar initiative, founded out of the nonprofit Founders Forum for Good, whereby entrepreneurs make a legally binding commitment to donate a percentage of their personal proceeds to charity in the event that they sell their business. As of February 2022, roughly 1,700 entrepreneurs had pledged over $7 billion and over $500 million had been donated.

An estimated $416 million was donated to effective charities identified by the movement in 2019, representing a 37% annual growth rate since 2015. Two of the largest donors in the effective altruist community, Cari Tuna and Dustin Moskovitz, who had become wealthy through co-founding Facebook, hope to donate most of their net worth of over $11 billion for effective altruism causes through the private foundation Good Ventures. Other prominent philanthropists influenced by effective altruism include Bill and Melinda Gates, Warren Buffett, Elon Musk, Sam Bankman-Fried, and Peter Thiel, as well as professional poker players Dan Smith and Liv Boeree. One researcher estimated in 2021 that effective altruism has roughly $46 billion committed to effective charities.

Career choice

Effective altruists have argued that one's career is an important determinant of the amount of good one does, both directly (through the services one provides) and indirectly (through one's consumption, investment, and donation decisions).

80,000 Hours is an organization that conducts research on which careers have the largest positive social impact and provides career advice based on that research. It considers both direct and indirect kinds of altruistic employment.

Earning to give is a prominent approach to career choice among effective altruists. It involves choosing to work in high-paying careers with the explicit goal of donating large sums of money to charity. Earning to give has been a subject of debate. For example, high profile individuals and institutions within the movement have disagreed on when it is appropriate to work in morally controversial jobs. William MacAskill argued in 2014 that sufficient donations might justify an otherwise morally controversial career, since the marginal impact of taking an unethical job is small if someone else would have taken it regardless, while the impact of the donations could be large. In 2017, 80,000 Hours recommended that it is better to avoid careers that do significant direct harm, even if it seems like the negative consequences could be outweighed by donations. This is because the harms from such careers may be hidden or otherwise hard to measure, and because they think it is important to account for moral uncertainty—for example, not knowing to what degree one should minimize the negative consequences that one hopes to outweigh by donations.

Earning to give has faced criticism from commentators such as David Brooks and Pascal-Emmanuel Gobry. In 2013, Brooks published an article criticizing the earning to give approach. He wrote that most people who work in finance and other high-paying industries value money for selfish reasons and that working among such people will cause effective altruists to become less altruistic. Peter Singer responded to these criticisms in his book The Most Good You Can Do by giving examples of people who have been earning to give for years without losing their altruism. Separately, Pascal-Emmanuel Gobry argued that the practice was "unsettling", explaining that "the implication seems to be that taking a high-paying job selling fraudulent mortgage-backed securities is more praiseworthy than taking a low-paying job at the local homeless shelter, so long as one buys enough anti-malarial bed nets". Singer responded to this kind of "ethical objection" by arguing that effective altruists who are not utilitarians may be able to find a high-paying job that is not complicit in causing such harm, but even those who take such a complicit job have at least several ways of dealing with the situation, such as by lobbying the organization to change its harmful practices, which may be easier to do from their position inside the organization, or by quitting and blowing the whistle on the organization, which might not have been possible without gaining information while on the job.

Entrepreneurship

Members of the Lead Exposure Elimination Project's Madagascar branch sample local paints to send to the lab to test for lead content.

Some effective altruists are entrepreneurs, starting non-profit organizations to implement cost-effective ways of improving well-being, for-profit organizations to earn to give, or for-profit organizations to make social impact. On the non-profit side, for example, the Happier Lives Institute conducts research on the effectiveness of cognitive behavioral therapy (CBT) in developing countries; Canopie develops an app that provides CBT to women who are expecting or postpartum; Giving Green analyzes and ranks climate interventions for effectiveness; the Fish Welfare Initiative works on improving animal welfare in fishing and aquaculture; and the Lead Exposure Elimination Project works on reducing lead poisoning in developing countries. On the for-profit side, effective altruism supporter Sam Bankman-Fried founded the crypto currency exchange FTX with the explicit goal of amassing a fortune (currently more than $20 billion) and then donating most of his wealth to charity. An example of a for-profit company that aims to make social impact is Wave, a "radically affordable" mobile money service operating in Senegal that allows for free deposits and withdrawals, and charges a 1% fee for sending money.

Cause priorities

Effective altruism is in principle open to furthering any cause that allows people to do the most good, while taking into account cause neutrality. Examples of causes include providing food for those with food insecurity, protecting endangered species, mitigating climate change, reforming immigration policy, researching cures for illnesses, preventing sexual violence, alleviating poverty, eliminating factory farming, or averting nuclear warfare. Many people in the effective altruist movement have prioritized global health and development, animal welfare, and mitigating risks that threaten the future of humanity.

This practice of "weighing causes and beneficiaries against one another" has been criticized by Ken Berger and Robert Penna of Charity Navigator for being "moralistic, in the worst sense of the word". MacAskill responded to Berger and Penna, defending the rationale for comparing one beneficiary's interests against another and concluding that such comparison is difficult and sometimes impossible but often necessary.

Global health and development

Women and children receive anti-malarial nets in Malawi. The nets were provided by the Against Malaria Foundation, and distributed by a local organization.

The alleviation of global poverty and neglected tropical diseases has been a focus of some of the earliest and most prominent organizations associated with effective altruism.

Charity evaluator GiveWell was founded by Holden Karnofsky and Elie Hassenfeld in 2007 to address poverty. GiveWell has argued that the marginal impact of donations is greatest for attacking global poverty and health. Its leading recommendations have been in these domains: malaria prevention charities Against Malaria Foundation and Malaria Consortium, deworming charities Schistosomiasis Control Initiative and Deworm the World Initiative, and GiveDirectly for direct cash transfers to beneficiaries.

The organization The Life You Can Save, which originated from Singer's book of the same name, works to alleviate global poverty by promoting evidence-backed charities, conducting philanthropy education, and changing the culture of giving in affluent countries.

While much of the initial focus of effective altruism was on direct strategies such as health interventions and cash transfers, more systematic social, economic, and political reforms meant to facilitate larger long-term poverty reduction have also attracted attention. The Open Philanthropy Project, in collaboration with GiveWell, does research and philanthropic funding of more speculative and diverse causes such as policy reform, global catastrophic risk reduction and scientific research.

Animal welfare

An industrial chicken farm in Ukraine

Improving animal welfare has been a focus of many effective altruists. Singer and Animal Charity Evaluators have argued that effective animal welfare altruists should prioritize changes to factory farming over pet welfare. 60 billion land animals are slaughtered and between 1 and 2.7 trillion individual fish are killed each year for human consumption. Alternatively, Animal Ethics and Wild Animal Initiative focus on wild animal suffering. Other animal initiatives affiliated with effective altruism include Animal Ethics' and Wild Animal Initiative's work on wild animal suffering, addressing farm animal suffering with cultured meat, and expanding the circle of concern so that people care more about all kinds of animals.

A number of non-profit organizations have been established that adopt an effective altruist approach toward animal welfare. Animal Charity Evaluators (ACE) evaluates animal charities based on their cost-effectiveness and transparency, particularly those tackling factory farming. Faunalytics focuses on animal welfare research. The Sentience Institute is a think tank founded to expand the moral circle to other species.

Long-term future and global catastrophic risks

Global catastrophic risks, such as those arising from pandemics, are a priority of the effective altruism movement.

Some effective altruists subscribe to longtermism, an ethical stance that emphasizes the importance of positively influencing the long-term future. Longtermists believe that the welfare of future individuals is just as important as the welfare of currently existing individuals. Longtermist Toby Ord stated that he came to think that future risks are even more neglected than present suffering and "that the people of the future may be even more powerless to protect themselves from the risks we impose than the dispossessed of our own time".

In particular, the importance of addressing existential risks such as dangers associated with biotechnology and advanced artificial intelligence is often highlighted and the subject of active research.

Organizations that work actively on research and advocacy for improving the long-term future, and have connections with the effective altruism community, are the Future of Humanity Institute at the University of Oxford, the Centre for the Study of Existential Risk at the University of Cambridge, and the Future of Life Institute. In addition, the Machine Intelligence Research Institute is focused on the more narrow mission of managing advanced artificial intelligence.

Philosophy

Peter Singer is one of several philosophers who helped popularize effective altruism.

Effective altruists have pondered philosophical questions about the most effective ways to benefit others. Such philosophical questions shift the starting point of reasoning from "what to do" to why and how. Effective altruists have yet to reach consensus on the answers to all such questions, but the minimal philosophical core of effective altruism involves having some reason to promote the well-being of all others, and "more reason to benefit them more, and most reason to benefit them as much as possible", a principle of effective altruism that some philosophers have called maximizing altruism. Some effective altruists believe that they should do the most good they possibly can, while other effective altruists try do the most good they can within a defined budget.

Effective altruism can be compatible with a wide variety of views about morality and meta-ethics, such as the normative ethical theories of consequentialism, egalitarianism, prioritarianism, utilitarianism, contractualism, deontological ethics, virtue ethics, as well as traditional religious teachings on altruism such as in Christianity. Effective altruism can also be in some tension with religion insofar as religion emphasizes spending resources on worship and evangelism instead of causes that do more good.

Important principles that are discussed in literature about effective altruism include impartiality, cause prioritization, cost-effectiveness, and counterfactual reasoning.

Principles

Impartiality

An allegorical image of equality by Jean-Guillaume Moitte, 1793

Altruism can be motivated by different reasons. Some reasons are impartial, and others are sentimental, stemming from sympathy and compassion. Much of the published literature on effective altruism emphasizes impartial reasoning and concludes that, other things being equal, everyone's well-being counts equally, without regard to individual identities. Impartiality combined with seeking to do the most good leads to prioritizing benefits to those who are in a worse state, because anyone who happens to be worse off will benefit more from an improvement in their state, all other things being equal. Philosopher Peter Singer, in his 1972 essay "Famine, Affluence, and Morality" that has been influential among effective altruists, wrote:

It makes no moral difference whether the person I can help is a neighbor's child ten yards away from me or a Bengali whose name I shall never know, ten thousand miles away. ... The moral point of view requires us to look beyond the interests of our own society. Previously, ... this may hardly have been feasible, but it is quite feasible now. From the moral point of view, the prevention of the starvation of millions of people outside our society must be considered at least as pressing as the upholding of property norms within our society.

Impartiality is the basis of cause neutrality, which means choosing to distribute resources based on what will do the most good and not based on biased factors such as personal connections. Some effective altruists argue that because there will be more people in the future than there are now, the way to do the most good is to focus on promoting the long-term well-being of humanity by, for example, reducing risks to civilization, humans, and planet Earth. Some effective altruists think that non-human animals should have the same moral weight as that of humans, so they advocate for animal welfare issues such as ending factory farming.

Singer speculated in "Famine, Affluence, and Morality" that whether people think and act impartially is affected by social influence—what other people are expecting one to do. In his 2015 book The Most Good You Can Do, Singer admitted that even though he had argued in 1972 that "we ought to give large proportions of our income to disaster relief funds", he did not do it himself. He also noted personal psychological inertia as an obstacle to impartial altruism. Some sociological research has corroborated that social influence can undermine altruistic activity. To support people's ability to act altruistically on the basis of impartial reasoning, the effective altruism movement promotes additional values and actions, such as a collaborative spirit, honesty, transparency, and publicly pledging to donate a certain percentage of income or other resources.

Cause prioritization

Many nonprofits emphasize effectiveness and evidence with a single cause in mind, such as education or climate change. In contrast, effective altruists seek to compare the relative importance of different causes and allocate resources among them objectively, adopting cause neutrality. One approach to cause neutrality is to identify the highest priority cause areas based on whether activities within a cause area efficiently advance broad goals, such as increasing human or animal welfare, and then focus attention on interventions in the prioritized cause areas.

Effective altruist organizations such as 80,000 Hours and Open Philanthropy prioritize causes by evaluating each cause for its importance, tractability, and neglectedness. Importance is the amount of value that would be created if a problem were solved, tractability is the fraction of a problem that would be solved if additional resources were devoted to it, and neglectedness is the quantity of resources already committed to a cause. These three criteria help estimate the marginal benefit of allocating more resources, such as money or people, toward addressing an issue.

The information required for cause prioritization may involve data analysis, comparing possible outcomes with what would have happened under other conditions (counterfactual reasoning), and identifying uncertainty. The difficulty of these tasks has led to the creation of organizations that specialize in researching the relative prioritization of causes.

Cost-effectiveness

Some charities are far more effective than others, as charities may spend different amounts of money to achieve the same goal, and some charities may not achieve the goal at all. Effective altruists seek to identify charities that are highly cost-effective. For example, health interventions are selected based on their impact as measured by lives extended per dollar, quality-adjusted life years (QALY) added per dollar, or disability-adjusted life years (DALY) reduced per dollar.

Some effective altruist organizations prefer randomized controlled trials as a primary form of evidence, as they are commonly considered the highest level of evidence in healthcare research. Others have argued that requiring this stringent level of evidence unnecessarily narrows the focus to issues where the evidence can be developed, and that historically many effective interventions have proceeded without this level of evidence. Pascal-Emmanuel Gobry and others have warned about the "measurement problem": Issues such as medical research or government reform are worked on "one grinding step at a time", and results are hard to measure with controlled experiments. Such interventions risk being undervalued by the effective altruism movement.

Effective altruist organizations consider the expected impact of a funding increase rather than evaluating the average value of all donations to the charity. This avoids donations to organizations that lack room for more funding because they face bottlenecks other than lack of money. For example, a medical charity might not be able to hire enough doctors or nurses to distribute more medical supplies, or it might already be serving all of the potential patients in its market.

Counterfactual reasoning

Counterfactual reasoning involves considering the possible outcomes of alternative choices. It has been employed by effective altruists in a number of contexts, including career choice. Many people assume that the best way to help people is through direct methods, such as working for a charity or providing social services. However, since there is a high supply of candidates for such positions, it makes sense to compare the amount of good one candidate does to how much good the next-best candidate would do. According to this reasoning, the marginal impact of a career is likely to be smaller than the gross impact.

Anti-capitalist and institutional critiques

Writing for the American socialist magazine Jacobin, Mathew Snow said in 2015 that effective-altruist methodology is specifically biased against efforts for systemic change: "Effective Altruism ... implores individuals to use their money to procure necessities for those who desperately need them, but says nothing about the system that determines how those necessities are produced and distributed in the first place". Snow advocated overturning capitalism completely. Joshua Kissel argued that anti-capitalism is compatible with effective altruism in theory, while adding that effective altruists and anti-capitalists have reason to be more sympathetic to each other. Brian Berkey argued that support for institutional change does not contradict the principles of effective altruism, because effective altruism is open to any action that will have the greatest positive impact on the world, including the possibility of changing the existing global institutional order. Elizabeth Ashford argued that people are separately obligated to donate to effective aid charities and to reform the structures that are responsible for poverty. Timothy Syme summarized and critiqued various objections to anti-capitalist and institutional critiques of effective altruism.

Open Philanthropy has given grants for progressive advocacy work in areas such as criminal justice, economic stabilization, and housing reform, despite success being "highly uncertain" according to Open Philanthropy.

History

The movement that later adopted the name effective altruism was created in the late 2000s as a community formed around Giving What We Can, a group founded in 2009 by philosopher Ord with help from MacAskill, co-founder of 80,000 Hours in 2011. Those two groups, while planning to incorporate as a charity under a new umbrella organization, held a vote in 2011 to name the organization; the name "Centre for Effective Altruism" won. The "Effective Altruists" Facebook group was set up in November 2012, and the movement gained wider exposure with Peter Singer's TED talk "The Why and How of Effective Altruism" in May 2013. Other contributions were the writings of philosophers such as Singer on applied ethics and Bostrom on reducing the risk of human extinction, the founding of organizations such as GiveWell and The Life You Can Save, and the creation of internet forums such as LessWrong, part of the rationalist community that has attracted some effective altruists.

The Effective Altruism Global conference has been held since 2013. In 2015, Singer published The Most Good You Can Do. In the same year MacAskill published Doing Good Better: How Effective Altruism Can Help You Make a Difference.

In 2018, American news website Vox launched its Future Perfect section, led by journalist Dylan Matthews. Future Perfect has published written pieces and podcasts on the mission of "Finding the best ways to do good", including topics such as effective philanthropy, high-impact career choice, poverty reduction through women's empowerment, improving children's learning efficiently through improving environmental health, animal welfare improvements, and ways to reduce global catastrophic risks.

Consumer price index

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Consumer_price_index 

 

Consumer Price Index

  CPI

  Core CPI

 

  M2 % change from a year ago

  CPI

 

Inflation and federal funds rate

A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time.

Overview

A CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indices and sub-sub-indices can be computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e. adjust for the effect of inflation) the real value of wages, salaries, and pensions; to regulate prices; and to deflate monetary magnitudes to show changes in real values. In most countries, the CPI, along with the population census, is one of the most closely watched national economic statistics.

Inflation compared to federal funds rate

 

A graph of the US CPI from 1913 (in blue), and its percentage annual change (in red)

The index is usually computed monthly, or quarterly in some countries, as a weighted average of sub-indices for different components of consumer expenditure, such as food, housing, shoes, clothing, each of which is, in turn, a weighted average of sub-sub-indices. At the most detailed level, the elementary aggregate level, (for example, men's shirts sold in department stores in San Francisco), detailed weighting information is unavailable, so indices are computed using an unweighted arithmetic or geometric mean of the prices of the sampled product offers. (However, the growing use of barcode scanner data is gradually making weighting information available even at the most detailed level.) These indices compare prices each month with prices in the price-reference month. The weights used to combine them into the higher-level aggregates, and then into the overall index, relate to the estimated expenditures during a preceding whole year of the consumers covered by the index on the products within its scope in the area covered. Thus the index is a fixed-weight index, but rarely a true Laspeyres index, since the weight-reference period of a year and the price-reference period, usually a more recent single month, do not coincide.

Ideally, the weights would relate to the composition of expenditure during the time between the price-reference month and the current month. There is a large technical economics literature on index formulas which would approximate this and which can be shown to approximate what economic theorists call a true cost-of-living index. Such an index would show how consumer expenditure would have to move to compensate for price changes so as to allow consumers to maintain a constant standard of living. Approximations can only be computed retrospectively, whereas the index has to appear monthly and, preferably, quite soon. Nevertheless, in some countries, notably in the United States and Sweden, the philosophy of the index is that it is inspired by and approximates the notion of a true cost of living (constant utility) index, whereas in most of Europe it is regarded more pragmatically.

The coverage of the index may be limited. Consumers' expenditure abroad is usually excluded; visitors' expenditure within the country may be excluded in principle if not in practice; the rural population may or may not be included; certain groups such as the very rich or the very poor may be excluded. Saving and investment are always excluded, though the prices paid for financial services provided by financial intermediaries may be included along with insurance.

The index reference period, usually called the base year, often differs both from the weight-reference period and the price-reference period. This is just a matter of rescaling the whole time series to make the value for the index reference-period equal to 100. Annually revised weights are a desirable but expensive feature of an index, for the older the weights the greater is the divergence between the current expenditure pattern and that of the weight reference-period.

It is calculated and reported on a per region or country basis on a monthly and annual basis. International organizations like the Organisation for Economic Co-operation and Development (OECD) report statistical figures like the consumer price index for many of its member countries. In the US the CPI is usually reported by the Bureau of Labor Statistics.

An English economist by the name of Joseph Lowe first proposed the theory of price basket index in 1832. His fixed basket approach was relatively simple as Lowe computed the price of a list of goods in period 0 and compared the price of that same basket of goods in period 1. Since his proposed theories however were elementary, later economists built on his ideas to form our modern definition.

Calculating the CPI for a single item

${\displaystyle {\text{consumer price index}}={\frac {\text{market basket of desired year}}{\text{market basket of base year}}}\times {\text{100}}}$

or

${\displaystyle {\frac {{\text{CPI}}_{2}}{{\text{CPI}}_{1}}}={\frac {{\text{price}}_{2}}{{\text{price}}_{1}}}}$

Where 1 is usually the comparison year and CPI₁ is usually an index of 100.

Alternatively, the CPI can be performed as ${\displaystyle {\text{CPI}}={\frac {\text{updated cost}}{\text{base period cost}}}\times 100}$. The "updated cost" (i.e. the price of an item at a given year, e.g.: the price of bread in 2018) is divided by that of the initial year (the price of bread in 1970), then multiplied by one hundred.

Calculating the CPI for multiple items

Many but not all price indices are weighted averages using weights that sum to 1 or 100.

Example: The prices of 85,000 items from 22,000 stores, and 35,000 rental units are added together and averaged. They are weighted this way: housing 41.4%; food and beverages 17.4%; transport 17.0%; medical care 6.9%; apparel 6.0%; entertainment 4.4%; other 6.9%. Taxes (43%) are not included in CPI computation.

${\displaystyle \mathrm {CPI} ={\frac {\sum _{i=1}^{n}\mathrm {CPI} _{i}\times \mathrm {weight} _{i}}{\sum _{i=1}^{n}\mathrm {weight} _{i}}}}$

where the ${\displaystyle \mathrm {weight} _{i}}$ terms do not necessarily sum to 1 or 100.

Weighting

Weights and sub-indices

By convention, weights are fractions or ratios summing to one, as percentages summing to 100 or as per mille numbers summing to 1000.

On the European Union's Harmonized Index of Consumer Prices (HICP), for example, each country computes some 80 prescribed sub-indices, their weighted average constituting the national HICP. The weights for these sub-indices will consist of the sum of the weights of a number of component lower level indices. The classification is according to use, developed in a national accounting context. This is not necessarily the kind of classification that is most appropriate for a consumer price index. Grouping together of substitutes or of products whose prices tend to move in parallel might be more suitable.

For some of these lower-level indices detailed reweighing to make them be available, allowing computations where the individual price observations can all be weighted. This may be the case, for example, where all selling is in the hands of a single national organisation which makes its data available to the index compilers. For most lower level indices, however, the weight will consist of the sum of the weights of a number of elementary aggregate indices, each weight corresponding to its fraction of the total annual expenditure covered by the index. An 'elementary aggregate' is a lowest-level component of expenditure: this has a weight, but the weights of each of its sub-components are usually lacking. Thus, for example: Weighted averages of elementary aggregate indices (e.g. for men's shirts, raincoats, women's dresses, etc.) make up low-level indices (e.g. outer garments).

Weight averages of these, in turn, provide sub-indices at a higher, more aggregated level (e.g. clothing) and weighted averages of the latter provide yet more aggregated sub-indices (e.g. Clothing and Footwear).

Some of the elementary aggregate indices and some of the sub-indices can be defined simply in terms of the types of goods and/or services they cover. In the case of such products as newspapers in some countries and postal services, which have nationally uniform prices. But where price movements do differ or might differ between regions or between outlet types, separate regional and/or outlet-type elementary aggregates are ideally required for each detailed category of goods and services, each with its own weight. An example might be an elementary aggregate for sliced bread sold in supermarkets in the Northern region.

Most elementary aggregate indices are necessarily 'unweighted' averages for the sample of products within the sampled outlets. However, in cases where it is possible to select the sample of outlets from which prices are collected so as to reflect the shares of sales to consumers of the different outlet types covered, self-weighted elementary aggregate indices may be computed. Similarly, if the market shares of the different types of products represented by product types are known, even only approximately, the number of observed products to be priced for each of them can be made proportional to those shares.

Estimating weights

The outlet and regional dimensions noted above mean that the estimation of weights involves a lot more than just the breakdown of expenditure by types of goods and services, and the number of separately weighted indices composing the overall index depends upon two factors:

1. The degree of detail to which available data permit breakdown of total consumption expenditure in the weight reference-period by type of expenditure, region and outlet type.
2. Whether there is reason to believe that price movements vary between these most detailed categories.

How the weights are calculated, and in how much detail, depends upon the availability of information and upon the scope of the index. In the UK the retail price index (RPI) does not relate to the whole of consumption, for the reference population is all private households with the exception of pensioner households that derive at least three-quarters of their total income from state pensions and benefits, and "high income households" whose total household income lies within the top four per cent of all households. The result is that it is difficult to use data sources relating to total consumption by all population groups.

For products whose price movements can differ between regions and between different types of outlet:

• The ideal, rarely realizable in practice, would consist of estimates of expenditure for each detailed consumption category, for each type of outlet, for each region.
• At the opposite extreme, with no regional data on expenditure totals but only on population (e.g. 24% in the Northern region) and only national estimates for the shares of different outlet types for broad categories of consumption (e.g. 70% of food sold in supermarkets) the weight for sliced bread sold in supermarkets in the Northern region has to be estimated as the share of sliced bread in total consumption × 0.24 × 0.7.

The situation in most countries comes somewhere between these two extremes. The point is to make the best use of whatever data are available.

The nature of the data used for weighing

No firm rules can be suggested on this issue for the simple reason that the available statistical sources differ between countries. However, all countries conduct periodical household-expenditure surveys and all produce breakdowns of consumption expenditure in their national accounts. The expenditure classifications used there may however be different. In particular:

• Household-expenditure surveys do not cover the expenditures of foreign visitors, though these may be within the scope of a consumer price index.
• National accounts include imputed rents for owner-occupied dwellings which may not be within the scope of a consumer price index.

Even with the necessary adjustments, the national-account estimates and household-expenditure surveys usually diverge.

The statistical sources required for regional and outlet-type breakdowns are usually weak. Only a large-sample Household Expenditure survey can provide a regional breakdown. Regional population data are sometimes used for this purpose, but need adjustment to allow for regional differences in living standards and consumption patterns. Statistics of retail sales and market research reports can provide information for estimating outlet-type breakdowns, but the classifications they use rarely correspond to COICOP categories.

The increasingly widespread use of bar codes, scanners in shops has meant that detailed cash register printed receipts are provided by shops for an increasing share of retail purchases. This development makes possible improved Household Expenditure surveys, as Statistics Iceland has demonstrated. Survey respondents keeping a diary of their purchases need to record only the total of purchases when itemized receipts were given to them and keep these receipts in a special pocket in the diary. These receipts provide not only a detailed breakdown of purchases but also the name of the outlet. Thus response burden is markedly reduced, accuracy is increased, product description is more specific and point of purchase data are obtained, facilitating the estimation of outlet-type weights.

There are only two general principles for the estimation of weights: use all the available information and accept that rough estimates are better than no estimates.

Reweighing

Ideally, in computing an index, the weights would represent current annual expenditure patterns. In practice, they necessarily reflect past using the most recent data available or, if they are not of high quality, some average of the data for more than one previous year. Some countries have used a three-year average in recognition of the fact that household survey estimates are of poor quality. In some cases, some of the data sources used may not be available annually, in which case some of the weights for lower-level aggregates within higher-level aggregates are based on older data than the higher level weights.

Infrequent reweighing saves costs for the national statistical office but delays the introduction into the index of new types of expenditure. For example, subscriptions for Internet service entered index compilation with a considerable time lag in some countries, and account could be taken of digital camera prices between re-weightings only by including some digital cameras in the same elementary aggregate as film cameras.

Owner-occupiers and the price index

The way in which owner-occupied dwellings should be dealt with in a consumer price index has been, and remains, a subject of heated controversy in many countries. Various approaches have been considered, each with their advantages and disadvantages.

The economists' approach

See also: Imputed rent

Leaving aside the quality of public services, the environment, crime and so forth, and regarding the standard of living as a function of the level and composition of individuals' consumption, this standard depends upon the amount and range of goods and services they consume. These include the service provided by rented accommodation, which can readily be priced, and the similar services yielded by a flat or house owned by the consumer who occupies it. Its cost to a consumer is, according to the economic way of thinking, an "opportunity cost", namely what he or she sacrifices by living in it. This cost, according to many economists, is what should form a component of a consumer price index.

Opportunity cost can be looked at in two ways, since there are two alternatives to continuing to live in an owner-occupied dwelling. One – supposing that it is one year's cost that is to be considered – is to sell it, earn interest on the owner's capital thus released, and buy it back a year later, making an allowance for its physical depreciation. This can be called the "alternative cost" approach. The other, the "rental equivalent" approach, is to let it to someone else for the year, in which case the cost is the rent that could be obtained for it.

There are practical problems in implementing either of these economists' approaches. Thus, with the alternative cost approach, if house prices are rising fast the cost can be negative and then become sharply positive once house prices start to fall, so such an index would be very volatile. On the other hand, with the rental equivalent approach, there may be difficulty in estimating the movement of rental values of types of property that are not actually rented. If one or other of these measures of the consumption of the services of owner-occupied dwellings is included in consumption, then it must be included in income too, for income equals consumption plus saving. This means that if the movement of incomes is to be compared with the movement of the consumer price index, incomes must be expressed as money income plus this imaginary consumption value. That is logical, but it may not be what users of the index want.

Although the argument has been expressed in connection with owner-occupied dwellings, the logic applies equally to all durable consumer goods and services. Furniture, carpets and domestic appliances are not used up soon after purchase in the way that food is. Like dwellings, they yield a consumption service that can continue for years. Furthermore, since strict logic is to be adhered to, there are durable services as well that ought to be treated in the same way; the service consumers derive from appendectomies or crowned teeth continue for a long time. Since estimating values for these components of consumption has not been tackled, economic theorists are torn between their desire for intellectual consistency and their recognition that inclusion of the opportunity cost of the use of durables is impracticable.

Spending

Another approach is to concentrate on spending. Everyone agrees that repairs and maintenance expenditure of owner-occupied dwellings should be covered in a consumer price index, but the spending approach would include mortgage interest too. This turns out to be quite complicated, conceptually as well as in practice.

To explain what is involved, consider a consumer price index computed with reference to 2009 for just one sole consumer who bought her house in 2006, financing half of this sum by raising a mortgage. The problem is to compare how much interest such a consumer would now be paying with the interest that was paid in 2009. Since the aim is to compare like with like, that requires an estimate of how much interest would be paid now in the year 2010 on a similar house bought and 50% mortgage-financed three years ago, in 2007. It does not require an estimate of how much that identical person is paying now on the actual house she bought in 2006, even though that is what personally concerns her now.

A consumer price index compares how much it would cost now to do exactly what consumers did in the reference-period with what it cost then. Application of the principle thus requires that the index for our one house owner should reflect the movement of the prices of houses like hers from 2006 to 2007 and the change in interest rates. If she took out a fixed-interest rate mortgage it is the change in interest rates from 2006 to 2007 that counts; if she took out a variable interest mortgage it is the change from 2009 to 2010 that counts. Thus her current index with 1999 as reference-period will stand at more than 100 if house prices or, in the case of a fixed-interest mortgage, interest rates rose between 2006 and 2007.

The application of this principle in the owner-occupied dwellings component of a consumer price index is known as the "debt profile" method. It means that the current movement of the index will reflect past changes in dwelling prices and interest rates. Some people regard this as odd. Quite a few countries use the debt profile method, but in doing so most of them behave inconsistently. Consistency would require that the index should also cover the interest on consumer credit instead of the whole price paid for the products bought on credit if it covers mortgage interest payments. Products bought on credit would then be treated in the same way as owner-occupied dwellings.

Variants of the debt profile method are employed or have been proposed. One example is to include down payments as well as interest. Another is to correct nominal mortgage rates for changes in dwelling prices or for changes in the rest of the consumer price index to obtain a "real" rate of interest. Also, other methods may be used alongside the debt profile method. Thus several countries include a purely notional cost of depreciation as an additional index component, applying an arbitrarily estimated, or rather guessed, depreciation rate to the value of the stock of owner-occupied dwellings. Finally, one country includes both mortgage interest and purchase prices in its index.

Transaction prices

The third approach simply treats the acquisition of owner-occupied dwellings in the same way as acquisitions of other durable products are treated. This means:

• Taking account of the transaction prices agreed;
• Ignoring whether payments are delayed or are partly financed by borrowing;
• Leaving out second-hand transactions. Second-hand purchases correspond to sales by other consumers. Thus only new dwellings would be included.

Furthermore, expenditure on enlarging or reconstructing an owner-occupied dwelling would be covered, in addition to regular maintenance and repair. Two arguments of an almost theological character are advanced in connection with this transactions approach.

One argument is that purchases of new dwellings are treated as 'investment' in the system of national accounts, so should not enter a consumption price index. It is said that this is more than just a matter of terminological uniformity. For example, it may be thought to help understanding and facilitate economic analysis if what is included under the heading of 'consumption' is the same in the consumer price index and in the national income and expenditure accounts. Since these accounts include the equivalent rental value of owner-occupied dwellings, the equivalent rental approach would have to be applied in the consumer price index too. But the national accounts do not apply it to other durables, so the argument demands consistency in one respect but accepts its rejection in another.

The other argument is that the prices of new dwellings should exclude that part reflecting the value of the land, since this is an irreproducible and permanent asset that cannot be said to be consumed. This would presumably mean deducting site value from the price of a dwelling, site value presumably being defined as the price the site would fetch at auction if the dwelling were not on it. How this is to be understood in the case of multiple dwellings remains unclear.

Confusion

The merits of the different approaches are multidimensional, including feasibility, views on the way the index should and would move in particular circumstances, and theoretical properties of the index.

Statisticians in a country lacking a good dwelling price index (which is required for all except the rental equivalent method) will go along with a proposal to use such an index only if they can obtain the necessary additional resources that will enable them to compile one. Even obtaining mortgage interest rate data can be a major task in a country with a multitude of mortgage lenders and many types of mortgage. Dislike of the effect upon the behavior of the consumer price index arising from the adoption of some methods can be a powerful, if sometimes unprincipled, argument.

Dwelling prices are volatile and so, therefore, would be an index incorporating the current value of a dwelling price sub-index which, in some countries, would have a large weight under the third approach. Furthermore, the weight for owner-occupied dwellings could be altered considerably when reweighting was undertaken. (It could even become negative under the alternative cost approach if weights were estimated for a year during which house prices had been rising steeply).

Then, there is the point that a rise in interest rates designed to halt inflation could paradoxically make inflation appear higher if current interest rates showed up in the index. Economists' principles are not acceptable to all; nor is insistence upon consistency between the treatment of owner-occupied dwellings and other durables.

Consumer price indices in the United States

Main article: United States Consumer Price Index

In the United States several different consumer price indices are routinely computed by the Bureau of Labor Statistics (BLS). These include the CPI-U (for all urban consumers), CPI-W (for Urban Wage Earners and Clerical Workers), CPI-E (for the elderly), and C-CPI-U (chained CPI for all urban consumers). These are all built over two stages. First, the BLS collects data to estimate 8,018 separate item–area indices reflecting the prices of 211 categories of consumption items in 38 geographical areas. In the second stage, weighted averages are computed of these 8,018 item–area indices. The different indices differ only in the weights applied to the different 8,018 item–area indices. The weights for CPI-U and CPI-W are held constant for 24 months, changing in January of even-numbered years. The weights for C-CPI-U are updated each month to reflecting changes in consumption patterns in the last month. Thus, if people on average eat more chicken and less beef or more apples and fewer oranges than the previous month, that change would be reflected in next month's C-CPI-U. However, it would not be reflected in CPI-U and CPI-W until January of the next even-numbered year.

This allows the BLS to compute consumer price indices for each of the designated 38 geographical areas and for aggregates like the Midwest.

In January of each year, Social Security recipients receive a cost-of-living adjustment (COLA) "to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not eroded by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)". The use of CPI-W conflicts with this purpose, because the elderly consume substantially more health care goods and services than younger people. In recent years, inflation in health care has substantially exceeded inflation in the rest of the economy. Since the weight on health care in CPI-W is much less than the consumption patterns of the elderly, this COLA does not adequately compensate them for the real increases in the costs of the items they buy.

The BLS does track a consumer price index for the elderly (CPI-E). It is not used, in part because the social security trust fund is forecasted to run out of money in roughly 40 years, and using the CPI-E instead of CPI-W would shorten that by roughly five years.

The most recent December 2021 CPI reading hit 7%, the highest level in over 40 years. In response Jerome Powell, chair of the Federal Reserve has begun Quantitative tightening with rate hikes expected to begin in March 2022.

History

The CPI for various years are listed below with 1982 as the base year: A CPI of 150 means that there was 50% increase in prices, or 50% inflation, since 1982.

Year	CPI
1920	20.0
1930	16.7
1940	14.0
1950	24.1
1960	29.6
1970	38.8
1980	82.4
1982	100
1990	130.7
2000	172.2
2010	219.2
2018	251.1

Chained CPI

Main article: United States Chained Consumer Price Index

Former White House Chief of Staff Erskine Bowles and former U.S. Senator Alan K. Simpson suggested a transition to using a "chained CPI" in 2010, when they headed the White House's deficit-reduction commission. They stated that it was a more accurate measure of inflation than the current system and switching from the current system could save the government more than $290 billion over the decade following their report. "The chained CPI is usually 0.25 to 0.30 percentage points lower each year, on average, than the standard CPI measurements".

However, the National Active and Retired Federal Employees Associations said that the chained CPI does not account for seniors citizens' health care costs. Robert Reich, former United States Secretary of Labor under President Clinton, noted that typical seniors spend between 20 and 40 percent of their income on health care, far more than most Americans. "Besides, Social Security isn't in serious trouble. The Social Security trust fund is flush for at least two decades. If we want to ensure it's there beyond that, there's an easy fix – just lift the ceiling on income subject to Social Security taxes, which is now $113,700."

Replacing the current cost-of-living adjustment calculation with the chained CPI was considered, but not adopted, as part of a deficit-reduction proposal to avert the sequestration cuts, or fiscal cliff, in January 2013, but President Obama included it in his April 2013 budget proposal.

Personal consumption expenditures price index

Main article: Personal consumption expenditures price index

 

  CPI

  Core CPI

  PCE

  Core PCE

 

CPI vs PCE

Because of some shortcomings of the CPI, notably that it uses static expenditure weighting and it does not account for the substitution effect, the PCEPI is an alternative price index used by the Federal Reserve, among others, to measure inflation. From January 1959 through July 2018, inflation measured by the PCEPI has averaged 3.3%, while it has averaged 3.8% using CPI.