Subindexes for the Poor

Government poverty programs and guidelines are regularly adjusted for inflation. The Census Bureau poverty thresholds and the Department of Health and Human Services poverty guidelines, food stamp programs, low-income housing, and home energy assistance programs are all adjusted using the CPI-U. However, because the CPI is plutocratic, the representative household is upper middle class, which means that price changes—as captured by the CPI—are potentially very different than price changes faced by “average” low-income households.

Early on, in work for the Joint Economic Committee, Arrow (1958) pointed out that separate subindexes for different income groups might be appropriate for certain policy applications. He reasoned that observed consumption patterns, most notably the proportion of necessities to luxury goods, are likely to be quite different for low- versus high-income households. Subsequent research has been directed toward generating empirical evidence to ascertain whether or not divergent group consumption patterns do translate into significantly different group inflation rates.

Snyder (1961) pioneered work contrasting the growth rates of experimental indexes for high- and low-income groups. For the period 1936-1955, she estimated Laspeyres indexes for food items—categorized by income and income-food commodity elasticity—purchased by population subgroups. Price growth for low-income (and low-income elasticity) items was generally greater than price growth of middle- or high-income items. However, she also constructed a Paasche index series from 1955 Department of Agriculture food expenditure data that revealed no significant variation across income groups.

Snyder showed that, during the period’s recessions, prices of items that constituted high-expenditure shares for the poor declined more slowly than did prices of goods in general. During expansions or periods characterized by high inflation, the price growth of low-income items outpaced the price growth of items purchased proportionately more by middle- or higher-income households. Kuznets (1962) corroborated a specific component of this relationship, documenting a time trend indicating that, as income rises, food prices rise relatively faster than prices of manufactured goods. Deaton and Muellbauer (1980) estimated that in Britain during the high-inflation period 1975-1976, the inflation rate was 2 percentage points higher for the poor than for the general population.

More recently, BLS has tracked price inflation for the poor using item share weight-adjusted indexes. Garner et al. (1996) report results derived from the BLS experimental price index. The stated goal of the program is “to determine whether such an index would be lower than, higher than, or equal to the current CPI-U” (p. 32). In constructing the index, CEX data are used to calculate item category expenditure weights that reflect consumption patterns of the poor. The poor are defined three ways: by program participation, by household expenditure levels, and by income. The authors compute weights using each definition and then

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