Chain-Weighted CPI

AAA

DEFINITION of 'Chain-Weighted CPI'

An alternative measurement for the Consumer Price Index (CPI) that considers product substitutions made by consumers and other changes in their spending habits. The chain-weighted CPI is therefore considered to be a more accurate inflation gauge than the traditional fixed-weighted CPI, because rather than merely measuring periodic changes in the price of a fixed basket of goods, it accounts for the fact that consumers’ purchasing decisions change along with changes in prices. Because the fixed-weighted CPI may consistently overstate inflation by ignoring the disinflationary effect of quality improvements and new technology, in addition to the substitution effect, the U.S. Bureau of Labor Statistics maintains that the chain-weighted CPI is a closer approximation to a cost-of-living index than other CPI measures.
 

INVESTOPEDIA EXPLAINS 'Chain-Weighted CPI'

For example, consider the impact of two similar and substitutable products – beef and chicken – in the shopping basket of Mrs. Smith, a typical consumer. (Let’s ignore for the moment the fact that the "core" inflation rate ignores food and energy prices because they are too volatile.) Mrs. Smith buys two pounds of beef at $4 / lb. and two pounds of chicken at $3 / lb. A year later, the price of beef has risen to $5 / lb. while the price of chicken is unchanged at $3 / lb. Mrs. Smith therefore adjusts her spending pattern because of the higher price of beef, and buys three pounds of chicken, but only one pound of beef.
 
The fixed-weighted CPI measure would assume that the composition of Mrs. Smith’s shopping basket is unchanged from a year earlier, and would compute the inflation rate as 14.3% (i.e. the difference between the total price of $14 and $16 paid for two pounds of beef and chicken a year apart). The chain-weighted CPI measure would, however, consider the effect of Mrs. Smith substituting a pound of beef with a pound of chicken because of its lower price, and would compute the inflation rate as zero (because the total amount spent is unchanged at $14).
 

RELATED TERMS
  1. Constant Dollar

    An adjusted value of currency used to compare dollar values from ...
  2. Corruption Perception Index - CPI

    A ranking of countries according to the extent to which corruption ...
  3. Halo Effect

    The halo effect is a term used in marketing to explain the bias ...
  4. Consumer Price Index - CPI

    A measure that examines the weighted average of prices of a basket ...
  5. Inflation

    The rate at which the general level of prices for goods and services ...
  6. Supply Chain

    The network created amongst different companies producing, handling ...
Related Articles
  1. Bonds & Fixed Income

    Coping With Inflation Risk

    Inflation is less dramatic than a crash, but it can be more devastating to your portfolio.
  2. Investing Basics

    Economic Indicators That Do-It-Yourself Investors Should Know

    Understanding these investing tools will put the market in your hands.
  3. Economics

    Why The Consumer Price Index Is Controversial

    Find out why economists are torn about how to calculate inflation.
  4. Retirement

    Will Obama’s Chained CPI Help Keep Inflation From Eating Into Your Savings?

    Learn the ways in which inflation nibbles away at your retirement income, especially in light of the President’s proposal for Chained CPI adjustments to Social Security.
  5. Personal Finance

    What Is "Chained CPI?"

    Chained CPI is one of many ways to approximate the impact of rising or falling prices to consumers' pocketbooks.
  6. Bonds & Fixed Income

    Understanding Interest Rates, Inflation And The Bond Market

    Get to know the relationships that determine a bond's price and its payout.
  7. Economics

    What You Should Know About Inflation

    Find out how this figure relates to your investment portfolio.
  8. Economics

    The Importance Of Inflation And GDP

    Learn the underlying theories behind these concepts and what they can mean for your portfolio.
  9. Investing

    What is the relationship between the PPI and the CPI?

    First, let's take a look at what these two acronyms mean: the PPI is the producer price index and the CPI is the consumer price index. Both indexes calculate the change in price of a set of goods ...
  10. Even though inflation currently seems tame, it's still the worst enemy of retirees. Here are some tips to reduce its impact.
    Professionals

    Tips For Managing Inflation In Retirement

    Even though inflation currently seems tame, it's still the worst enemy of retirees. Here are some tips to reduce its impact.

You May Also Like

Hot Definitions
  1. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  2. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  3. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  4. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  5. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center