The History of the Consumer Price Index: From WWI Shipyards to the Modern CPI
1917-1919: A Wartime Cost-of-Living Problem
The Consumer Price Index began as an answer to a labor dispute. During the First World War, prices in American shipbuilding centers rose sharply, and the federal government needed an impartial way to set wage adjustments for shipyard workers. Between 1917 and 1919 the Bureau of Labor Statistics conducted family expenditure surveys in dozens of industrial cities, recording what working households actually bought and what they paid for it. Those surveys produced the weights for a cost-of-living index. The Bureau had collected price data for decades before this — retail food prices from the early 1900s, wholesale prices earlier still — but the wartime studies were the first attempt to combine prices and household spending patterns into a single index of what living cost a typical family.
The 1920s-1940s: A Regular Series Takes Shape
The Bureau began publishing the index on a regular basis in 1921, and later constructed estimates running back to 1913, which is why the modern CPI series conventionally starts in that year. Through the interwar period the index was used mainly in wage bargaining and was known as the cost-of-living index. In the mid-1940s the Bureau formally dropped that label — the name overpromised, because a fixed-basket index measures the changing cost of a specified set of goods rather than the changing cost of maintaining a constant standard of living. Postwar, the index became embedded in the economy in a new way when major collective bargaining agreements, beginning with the auto industry in the late 1940s, tied wage escalators directly to it.
1978: CPI-U Broadens the Population Covered
For decades the index covered only urban wage earners and clerical workers — a population that shrank as a share of the country as employment shifted toward salaried and professional work. In January 1978 the BLS introduced the CPI-U, covering all urban consumers, which represents a far larger share of the U.S. population and is now the headline series quoted in news reports. The older series continued as the CPI-W, and it still matters: CPI-W is the measure used to calculate the annual Social Security cost-of-living adjustment. The Bureau also runs a Consumer Expenditure Survey on a continuing basis to update the spending weights, so the basket is periodically refreshed rather than frozen.
1983: Owners’ Equivalent Rent
The most consequential methodological change in the index's history concerned housing. Until the early 1980s the CPI treated an owner-occupied home partly as a current consumption purchase, folding house prices and mortgage interest costs directly into the index. That conflated an asset purchase with consumption and made the index swing with the housing and mortgage markets. In 1983 the BLS replaced this with owners’ equivalent rent of primary residence in the CPI-U — an estimate of what an owner-occupied home would rent for — on the reasoning that what a homeowner consumes each month is shelter services, not the house itself. The CPI-W adopted the same treatment in 1985. Shelter, including owners’ equivalent rent, is now one of the largest single components of the index.
1996-2002: The Boskin Commission and Formula Reform
In December 1996 an advisory commission chaired by the Stanford economist Michael Boskin reported to the Senate Finance Committee that the CPI overstated increases in the cost of living by roughly 1.1 percentage points a year, citing substitution between goods, substitution between outlets, unmeasured quality improvement, and the slow introduction of new products. Because so many federal payments and tax parameters were indexed to the CPI, the finding had large budgetary implications and provoked sustained debate about both the estimate and the commission's framing. The BLS had already been making incremental improvements and continued to do so, adopting a geometric-mean formula for many item categories at the end of the 1990s to allow for substitution within categories, and introducing the chained CPI (C-CPI-U) in 2002 as a measure that accounts for substitution across categories as well.