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  • Juanita Schwartzkopf

What Does Changing the Calculation Method for CPI Mean for Consumers and Businesses?

The calculation method for the CPI changed with the January 2023 results. The CPI is a function of the prices of a market basket of goods, and the relative weighting of consumers’ use of each individual item in the basket. The spending weighting had been updated every two years and will now be updated every year. The 2023 weighting will be based on consumer spending activity in 2021.

For readers who would like to see the weighting changes in detail, this link will take you to the Bureau of Labor Statistics page that shows the 2023 weighting under the previous approach which would use the 2019-2020 weights versus the new approach which will use the 2021 weights.

Calculating the CPI using the previous approach and the new approach shows the biggest impact to be from the change in weighting for Utility (piped) gas service. Under the old approach the one month change in Utility (piped) gas service would have been 7.71%, rather than the 6.62% reported under the new approach. The one month change for new vehicles increased from -0.31% to 0.46%. Those were the two categories that were most impactful in the overall CPI calculation.

Some experts and statisticians will certainly argue in favor of the change and others will argue against the change in calculation. As consumers of the information, we need to be aware that numbers can be manipulated, but the overall inflationary impact is that prices continue to rise, and this is the second year of widespread inflation.

On February 11, 2023 the January CPI was reported at 6.4%, for a two year January CPI increase of 14.4%. The two year December 2020 to 2022 increase was 14.0%. This means lenders and borrowers need to anticipate inflation stresses will continue throughout 2023.

This is the January 2023 inflation graph. The January 2023 inflation of 6.4% was layered on top of a January 2022 inflation of 7.5%.

The categories with the most negative impact on consumers were food, with an 18.4% two year increase, and natural gas, with a 57.0% two year increase.

The CPI graph with these categories displayed follows.

Clearly consumers are spending more for basics – food and energy. Businesses are feeling the impact of those cost increases also. In addition to the direct cost impact, businesses are feeling the impact of changing consumer choices resulting from inflation’s impact on the individual consumer’s budget.

What should a business do?

Businesses need to consider these impacts as they evaluate their 2023 forecasts. Two months into calendar year 2023 is a good time to re-evaluate management decisions and planning for 2023 before the first quarter of 2023 ends.

Evaluating customer and vendor contracts with a view to the current sell through rates is a good place to start the review.

Working capital management and forecasting is always a key planning tool. Preparing accounts receivable, inventory and accounts payable analysis and roll forward forecasting of those components will help identify problems before a business is stressed for cash or an ABL structure is in an over advance position.

For additional information on dealing with inflation, and the second year of inflation, refer to “What does the second year of inflation tell us?” and, “The Manufacturing PMI and Inventory Levels Provide Clues for Q1 2023”.


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