The Effects of Annual CPI Re-Weightings


Kevin Gale, Managing Director, Head of Fixed Income

Every month the Bureau of Labor Statistics (BLS) releases its calculation of the Consumer Price Index (CPI). After its release, market participants analyze the data and investment professionals adjust their economic outlooks based on the new data. Despite the rigor that the BLS uses to determine the monthly CPI data, most market participants criticize the data and its inaccuracies in calculating inflation.

To help adjust CPI to current consumer spending habits, the BLS re-weights the CPI index every two years. Starting in 2023 however, the re-weighting will be done on an annual basis instead. Of course, this will have an impact on CPI. Some of the weighting changes in the 2023 CPI calculation are shown in the data table.

  Jan. 2023 Weight Nov. 2021 Weight Change
Rent for Shelter 34.04% 32.05% +1.99%
Food at Home 8.70% 7.70% +1.00%
Food Away from Home 4.80% 6.30% -1.50%
Used Vehicles 2.70% 4.20% -1.50%
New Vehicles 4.30% 3.90% +0.40%
Gasoline 3.20% 3.90% -0.70%
Medical Care Services 6.65% 6.97% -0.32%

Source: Bureau of Labor Statistics

While the re-weighting of the CPI calculation on an annual basis makes sense, it poses challenges for market participants. For starters, the new weights are not known to investors ahead of time, which will make it difficult for economists to accurately forecast CPI data. In addition, although investors have had plenty of questions regarding the accuracy of CPI data in the past, the new weightings open up their own set of questions. For example, with the new weightings for 2023, Medical Care Services (which includes health insurance) fell to a weighting of 6.65% from 6.97%. As a percentage of income, we think most would agree that we are spending a higher percentage of our income on healthcare each year. Another question is how the new CPI calculation will impact cost of living formulas in areas such as rent and social security payments.

Overall, the recalibration of CPI is expected to have implications for monetary policy and consumers. The more accurate data could lead to changes in how the Federal Reserve sets interest rates. The consumer can also benefit from more accurate CPI data as it can better reflect the changes in the cost of living, which is used to adjust Social Security benefits and federal tax brackets. On the flip side, the re-weightings can lead to large adjustments to the CPI calculation and significant inaccuracies from market participants in projections. In the short-term, expect some volatility in the CPI data, which can lead to increased volatility in the markets after new data is released. It will take some time for market participants to adjust to the ever-changing weights, but they will adjust.

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