Public Comment on Consumer Inflation Measures Produced by Federal Statistical Agencies
Emily Campbell, Associate Director and Senior Fellow/Williamson Family Fellow for Applied Research
June 19, 2019
The Center for Community Solutions (Community Solutions) is a nonpartisan think tank focused on solutions to health, social and economic issues. Our mission is to provide strategic leadership and organize community resources to improve health, social and economic conditions through applied demographic research, nonpartisan policy analysis and advocacy and communication. We are hoping that the following comments help the Office of Management and Budget in its consideration of the consumer inflation measures produced by federal statistical agencies. Our comments focus on topic (2) from this request for public comment: the strengths and weaknesses of the use of the CPI-U to make annual adjustments to the Official Poverty Measure (OPM), as established in the Office of Management and Budget’s (OBM) Statistical Policy Directive #14, and discussion of potential alternative indexes.
Review of the current method of establishing OPM
According to the Census Bureau, “President Johnson’s January 1964 declaration of his ‘War on Poverty’ generated a new interest in measuring just how many people were in poverty and how those numbers changed from year to year.” Mollie Orshansky’s method of calculating poverty thresholds became the working definition of poverty for statistical planning in 1965, and the first Census publications about poverty were released two years later. In the intervening 50 years, America has witnessed dramatic changes in its economy, shifts in families’ spending habits and developments in the social services meant to help individuals who are impoverished. Yet the official methods of calculating the annual OPM remain largely unchanged. They are outdated and no longer reflect the experience of impoverished Americans, nor do they accurately count the number of Americans who are struggling.
The problems with how the federal government officially defines poverty have been well documented. Due to the insufficiency of the official statistical measures related to poverty, researchers have developed numerous other methods to determine the income required for American families to make ends meet. These include the Self-Sufficiency Standard, Living Wage and A.L.I.C.E. None of these provide estimates for small areas, which is one of the strengths of the U.S. Census Bureau’s data. The most robust examination of how to measure poverty was conducted by a National Academy of Sciences panel in the 1990s and the resulting recommendations were used by the Census Bureau to produce the Supplemental Poverty Measure (SPM) in the 2000s. In our view, the SPM is far superior to OPM because it more accurately assesses the amount of money needed to meet an American family’s basic needs, and incorporates the impact of non-cash public benefits, such as Medicaid and the Housing Choice Voucher Program, which help Americans make ends meet. Under the current OPM, much of the federal spending to alleviate or ameliorate poverty has no impact on the count of Americans who are living at or below poverty.
Strengths and weakness of different inflation indexes for use in establishing OPM
The request for comment states that “OBM will consider the need to update the specific inflation measure used to adjust OPM….” Simply changing the inflation measure used for the annual update of the OPM does not solve the underlying problems with using OPM to determine who in America is impoverished. However, certain inflation measures do more accurately reflect the costs that low-income Americans incur than others.
Spending habits are different for those with low incomes versus higher incomes. Utilizing data from the Consumer Expenditure Survey (CES) produced by the Bureau of Labor Statistics (BLS), we found that households in the lowest quintile (incomes less than $20,739) spend a great share of their income on basic needs like food, housing and healthcare. Households in the highest quintile (incomes more than $109,743) spend a greater share on transportation overall, specifically vehicle purchases, as well as personal insurance and pensions.
Necessities, including shelter, food at home, utilities, fuel, public services and health insurance, comprised 50 cents of every dollar spent by poor and near-poor American households in 2017, who are represented by the lowest quintile. The same necessities comprised only 33 cents of every dollar for the richest households, represented by the highest quintile.
Looking over the last year, price for those categories which make up a greater share of low income American’s spending have risen faster. The May 2019 Consumer Price Index for All Urban Consumers (CPI-U), shows that the unadjusted percent change of the price of several of these necessities grew faster than the CPI-U overall. This could indicate that inflation has a disproportionate impact on impoverished American households.
Therefore, we believe that shifting to another measure of inflation that has historically been lower than the CPI-U would mean that the estimate of annual changes in the Official Poverty Measure would be less reflective of the need for additional expenditures to pay for necessities for impoverished Americans.
The federal government’s production of official statistics is critical for local organizations who need to try to understand conditions in their communities and target scarce resources to areas of greatest need. Official estimates produced at small geographies are consistent and timely. The OPM was established to gain a sense of which Americans are impoverished and how those numbers have changed over time. Changing the measure of inflation used to estimate the Official Poverty Measure would not address the major criticism of how poverty is measured in the United States, and it could make the OPM even less relevant to what American families need to earn to make ends meet.
 U.S. Census Bureau, “Measuring America: Poverty: The History of a Measure.” 2014. https://www.census.gov/library/visualizations/2014/demo/poverty_measure-history.html
 The Self Sufficiency Standard is produced by the Center for Women’s Welfare at University of Washington (Seattle), http://www.selfsufficiencystandard.org/
 Living Wage is calculated by Massachusetts Institute of Technology, http://livingwage.mit.edu/
 A.L.I.C.E. is used by many United Ways across the country, https://www.unitedforalice.org/
 Data from Table 1101, of the Consumer Expenditure Survey, 2017, Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficients of variation. Analyzed by The Center for Community Solutions.
 Data from Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, by expenditure category, May 2019. Analyzed by The Center for Community Solutions.