Average retail food prices: a brief history of methods Essay

The Bureau of Labor Statistics publishes average retail food priceson a monthly basis in a news release, Consumer Prices: Energy and Food.Data are published for the United States and for four major geographicregions–Northeast, North Central, South, and West.

The report presentaverage prices for 94 food items that are calculated from data used incompiling the Consumer Price Index (CPI). All of the major CPI”food at home” categories–cereals and bakery products; meats,poulty, fish, and eggs; dairy products; fruits and vegetables; and otherfoods at home–are represented in the list of average food prices. Eachreport also contains data for the two preceding months. Average retail food prices are among the oldest data seriespublished by BLS.

The first report, issued in 1904, contained averagemonthly retail prices for about 30 foods for the years 1890-1903. Inputdata for the report were obtained retroactively from account books andrecords of about 800 firms in 171 cities. Prior to 1964, retail food prices were weighted averages of pricescollected for use in compiling the CPI. From December 1963 through June1978, average food prices were estimated from the movement of the CPI.

Each year, usually in January, special benchmark prices were calculatedfor narrowly defined classes of food products. These benchmark priceswere adjusted in succeeding months by price changes reflected in theappropriate CPI series. Because the CPI series pertained to morebroadly defined product categories than did the benchmark average foodprices, a new set of benchmark prices was computed annually to preventestimated prices from deviating widely from a true average of collectedprices.

The Bureau adopted this estimation technique for average prices asa result of changes made in the specification pricing procedures duringa revision of the CPI, completed in December 1963. As a part of thatrevision, the specifications used in collecting CPI prices werebroadened to encompass a wider sample of goods and services. While thisprocedure improved the item sample for the CPI, it made calculation ofthe average good prices difficult because of the greater heterogeneity of foods being priced within a specification. The “benchmark andestimation” technique for calculating average food prices was thendeveloped to meet the continuing needs of users of such information. Because of the major methodological changes introduced in the 1978revision of the CPI, a completely different approach had to be developedfor calculating average food prices. The demanding schedule for thecompletion of the 1978 CPI revision made it impossible to revise theaverage food price program in time to coincide with the release of therevised CPI. Therefore, average retail food prices are not availablefrom July 1978 through December 1979. Data based on the revised CPIsample are available beginning in January 1980, but average prices inthe current series are not comparable to estimates published throughJune 1978.

Development of the new average food price program for 1980presented the BLS staff with a number of difficulties. Because of thesubstantial change in price collection methodology employed in therevised CPI, a greater variety of food items (as well as nonfood goodsand services) have been selected for pricing. For the pre-1978 CPI, BLSfield representatives had priced items that conformed to detailedspecifications which were basically the same for every store across thecountry. Thus, a large number of prices were obtained for each of thealmost 100 food items. For an item such as cookies, for example, about1,100 prices were collected nationally each month.

The prices were foralmost identical types of cookies varying only by brand and packagesize. Therefore, an adequate number of observations were available tocalculate an average price for a specific type of cookies in individualcities as well as nationally. In the revised CPI, collection methodology was changed to allow foralmost the full range of goods and services to be sample. Under thisprocedure, the selection of each item is keyed to the sales experienceof the store in which it is priced.

The field representative works froma list of general categories in selecting the item to be priced. Thisprocedure gives each variety, brand, size, and so forth, a chance ofselection proportional to its importance in total sales for the generalcategory in the particular store. Once selected, the same itemcontinues to be priced over time. This procedure results in aconsiderably larger range of goods and services being selected for thefood item sample.

For calculating the CPI, the revised procedure produces an indexwhich is much more representative of the goods and services purchased byconsumers. Fewer prices are obtained, however, for any specific itembecause data collection is spread over a much broader range of foodproducts. For example, about 570 prices are presently being collectednationally for cookies. These prices are representative of virtuallyall kinds of cookies available in the marketplace, including packagedcookies, cookies sold loose in bakeries, dietetic cookies, and all ofthe various combinations of ingredients. Therefore, there arerelatively few observations for any one type of cookie, compared to the1,100 prices that were obtained for a specific type of cookie prior to1978. Because of the smaller number of quotations obtained for nearlycomparable food items, published average prices currently are availableonly at the national and regional level.

The number of prices available to calculate average prices for anyfood category in the CPI is dependent upon two factors: 1) the number ofprice quotations assigned to the product stratum (which assignment isdesigned for maximum accuracy of the CPI); and 2) the homogeneity of aspecific item with respect to ingredient composition, package size, andpackaging. Thus, for an item such as white pan bread, which has a largenumber of price quotations assigned to its stratum and which is arelatively homogeneous product, about 930 prices are obtainednationally, of which about 60 percent are used to calculate the U.S.average price.

Generally, for the purpose of average price calculation,very few items have usable sample sizes which approach that for whitepan bread. In developing post-1980 calculation procedures for average foodprices, several procedures were considered, including the use of thebenchmark and estimation procedure used in the earlier series. It wasdecided, however, to adopt a methodology in which actual weightedaverage prices would be calculated each month. In determining the itemsfor which to develop average prices, BLS identifies the narrowestpossible specification for which a usable sample can be obtained and anaverage price calculated.

If the specification is judged narrow enoughto be useful, an average price is published. For example, averageprices are calculated for freeze-dried instant coffee in jars ranging insize from 6.1 to 14 ounces.

The specification was narrowed to thisrange because the per-ounce price of freeze-dried instant coffee varieswidely from small jars (6 ounces or less) to large jars (more than 14ounces). Therefore, prices for jars outside the 6.1- to 14-ounce sizerange are excluded to eliminate price extremes which would not yieldrealistic average prices. The first step in calculating an average food price is thecomputation of an “effective price.” This procedure involvesconverting a reported price to a price per standard unit of measure(weight, volume, or count). The published average prices are weightedaverages of the individual effective prices. The weight of eachobservation reflects the relative share of expenditures which theindividual observations were selected to represent in the CPI.

(See”Consumer Price Index,” BLS Handbook of Methods, Volume II,Bulletin 2134–2, for a detailed methodological description.) Users of average retail food prices should be aware that these dataare best suited to measure price levels in a particular month. Theestimates are not designed to track price changes over time, nor arethey intended for use in making interarea comparisons. Ongoing updatesof the item and outlet samples will cause movement of average pricesover time to differ from the movement of an index for the same item,because the index reflects only price change for the same product in thesame retail outlet. In calculating average prices, individual quotesthat meet the item and geographic definitions are included, regardlessof whether they are used for index calculation. Differences in pricesamong geographic areas may not represent true differentials because ofvariations in brand, quality, and size of the sample. Of course, suchdifferences will vary considerably depending on the item being observed.

For an item such as boneless round steak, for which U.S. Department ofAgriculture grades are used to define the quality of the cut of meat,comparison of prices among regions is likely to be more informative thanfor items such as fresh pork sausage, ice cream, canned tomatoes, andsmoked ham, for which differences in brand and quality can be quitesubstantial.

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