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Measuring Poverty: A New Approach (1995)

Chapter: Updating for Price Changes

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Suggested Citation:"Updating for Price Changes." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
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POVERTY THRESHOLDS 123 such as the USDA food plans or HUD fair market rents: we have seen the elements of relativity (and, indeed, political considerations) that enter into those standards. BLS attempted to introduce some objectivity into standards for such commodities as clothing by the q-i-e approach, which assumed that the point at which the rate of increase in expenditures on the commodity relative to income slowed down was the point at which families no longer "needed" so much of the item. For most categories for which this approach was initially applied, however, there was no such inflection point or it came at a level that was not believable. Moreover, it is unclear whether the theory underlying this approach can be rigorously defended (see Expert Committee on Family Budget Revisions, 1980:30-34, for a detailed critique). Again, the BLS analysts had to make their own judgements, which, again, inevitably referred to actual spending patterns. Updating for Price Changes Until a new budget standard is adopted, expert budgets are usually updated for price changes to keep the dollar levels constant in real terms. An important issue in deciding to maintain a poverty line as an absolute standard—whether the line is originally developed from an expert budget or from another concept— is what type of price index to use. We have used values of the CPI-U (the Consumer Price Index for urban consumers) to express poverty thresholds developed under various methods for earlier years in constant 1992 dollars, because the original official poverty thresholds have historically been updated by the CPI-U, and we wanted to maintain the real dollar relationship between the 1963 two-adult/two-child family threshold of about $3,100 and the 1992 threshold of $14,228. But our purpose is purely illustrative. For use in maintaining an absolute poverty standard, one can argue for other price indexes. Historically, the CPI-U overestimated inflation due to its treatment of housing costs, although this problem was corrected in the last revision, introduced beginning in 1983.18 For years prior to 1983, BLS developed an experimental index, CPI-U-X1, which closely approximates the methodology of the current, improved CPI-U.19 If a combination of the 18 Prior to 1983, the measurement included changes in the asset value of homes; subsequently, it was modified to consider just the consumption aspects of home ownership by measuring changes in the equivalent rental costs for owned homes (see Bureau of the Census, 1993a: Appendix H). It is likely that, for other reasons, the CPI-U still overestimates inflation, but the extent is not known. 19 The CPI-U-X1 shows less inflation prior to 1983 than the CPI-U (particularly in the period 1978-1981, when sale prices of housing were rising significantly faster than equivalent rental costs). Values of the CPI-U-X1 have been created back to 1947, although for years prior to 1967 they are not an actual calculation using the BLS procedures, but a ratio adjustment to the CPI-U; see Bureau of the Census (1993b: Table B-1).

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Each year's poverty figures are anxiously awaited by policymakers, analysts, and the media. Yet questions are increasing about the 30-year-old measure as social and economic conditions change.

In Measuring Poverty a distinguished panel provides policymakers with an up-to-date evaluation of

  • Concepts and procedures for deriving the poverty threshold, including adjustments for different family circumstances.
  • Definitions of family resources.
  • Procedures for annual updates of poverty measures.

The volume explores specific issues underlying the poverty measure, analyzes the likely effects of any changes on poverty rates, and discusses the impact on eligibility for public benefits. In supporting its recommendations the panel provides insightful recognition of the political and social dimensions of this key economic indicator.

Measuring Poverty will be important to government officials, policy analysts, statisticians, economists, researchers, and others involved in virtually all poverty and social welfare issues.

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