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April 2014

The first hundred years of the Consumer Price Index: a methodological and political history

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The first major study conducted by the new Bureau of Labor (later to be renamed the Bureau of Labor Statistics) that influenced later work on a “cost of living” index was an examination of family expenditures and retail prices between 1888 and 1890. At the time, the federal government was accumulating large budget surpluses, and both Democrats and Republicans identified tariff policy as the preferred tool for reducing the surpluses. Tariffs had been set particularly high to pay off the large debt that accrued during the Civil War. Democrats proposed reducing tariff rates in order to reduce tariff revenue, whereas Republicans postulated that increasing tariff rates would restrict imports, thereby causing a reduction in tariff revenue. Congressional Republicans eventually won the debate and passed the Tariff Act of 1890, commonly called the McKinley Tariff, which increased the average tariff level from 38 percent to 49.5 percent. Concerned with the effect that this new tariff law would have on the cost of production in key industrial sectors, Congress requested the Bureau of Labor to conduct studies on wages, prices, and hours of work in the iron and steel, coal, textile, and glass industries.

As explained in Joseph P. Goldberg and William T. Moye’s The First Hundred Years of the Bureau of Labor Statistics, the “cost of living” at this time “referred to family expenditures, and thus the [cost-of-living] study sought to reflect the standard of living supported by the actual levels of family income.”2 From 1888 to 1890, expenditure data were collected from 8,544 families associated with the aforesaid industries. Retail prices were collected on “215 commodities, including 67 food items, in 70 localities,” from May 1889 to September 1891.3

These studies were significant because the data collected served as the source for what was likely the first application of indexing techniques to economic data collected by a U.S. federal statistical agency. Senator Nelson Aldrich, chairman of the Senate Finance Committee, hired Roland Falkner of the University of Pennsylvania to study the economic impacts of the new tariff policy as well. Falkner used the data collected by the Bureau of Labor to create weighted wholesale and retail price indexes for inclusion in the reports submitted to the Senate Finance Committee concerning the effects of the McKinley Tariff on the economy. It was remarked that the statistical methods and indexing techniques employed in the reports produced by the Bureau of Labor and Roland Falkner “constitute the most valuable contribution to the history of American economic conditions that has yet appeared.”4

About a decade after the Aldrich studies, the Bureau of Labor sought to create its own retail price index. Previous periods of economic misfortune and drastic changes in economic conditions, particularly a general increase in worldwide prices in 1896, initiated public debates on “living wages” and the “cost of living.”5 Bureau of Labor Commissioner Carroll Wright was repeatedly called upon by Presidents Grover Cleveland and Theodore Roosevelt not only to personally mediate labor disputes between industry and union leaders, but also to use the Bureau’s maturing statistical and survey expertise so that the agency could become the principal factfinder in investigations into strikes. One notable example, which provided the Bureau with further experience in collecting and indexing retail prices, was the use of the Anthracite Coal Strike Commission’s measure of the change in food prices in the anthracite coal region of Pennsylvania to award a wage increase to the striking United Mine Workers of America in eastern Pennsylvania in 1903.

Notes

 2 Joseph P. Goldberg and William T. Moye, The first hundred years of the Bureau of Labor Statistics (Washington, DC: U.S. Government Printing Office, 1985), p. 34.

 3 Ibid., p. 34.

 4 Ibid., p. 35.

 5 The Consumer Price Index: history and techniques, Bulletin 1517 (U.S. Bureau of Labor Statistics, 1966), p. 1.

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About the Author

Darren Rippy
rippy.darren@bls.gov

Darren Rippy is an economist in the Office of Prices and Living Conditions, Bureau of Labor Statistics.