Each time the Labor Department's consumer price index rises 1 per cent, it triggers a transfer to more than $1 billion from one set of pockets to another.
many labor contracts have clauses that require employers to boast workers' salaries in tendem with increases in the consumer price index.
Food stamps and federal subsidies to meals for schoolchildren are tied to the index, as are many rental agreements, child support payments, alimony payments and pensions.
So sensitive have Americans become to rising prices that they now seldom enter into long-term relationships - such as contracts or leases - without taking steps to guarantee that inflation does not erode the buying power of their income.
The consumer price index, once merely a tool of economic researchers, now governs to a greater or lesser extent, the incomes of more than 100 million Americans, according to Commissioner Julius Shiskin of the Bureau of Labor Statistics.
Just last month, for example, about a half-million General Motors Corp. employees got a 7-cents-and-hour pay boast to cover increases in the consumer price index over the previous three months. that quarterly cost-of-living adjusment will cost the giant automaker about $70 million a year in increased wages.
Next month, in an attempt to correct some deficiencies in the index, the Labor Department will publish the first thorough revision of the CPI in more than a decade and will represent the purchases of a broader segment of the population than does the current one. It was a seven-year project that cost about $60 million.
One of the troubles with the index the Labor Department publishes today is it has become outdated, reflecting the buyinb habits of Americans in 1962.
Furthermore, since the index has become so widely used to adjust incomes in all segments of the economy, in the opinion of many economists it does not represent the buying experience of enough of the population.
The index the Labor Department publishes today measures the change in price of a rigidly defined assortment of 398 goods and services - from beef to doctors' bills - thought to represent a typical set of purchases of an urban wage earner who heads a family of four. Urban wage earners and their families are about 40 per cent of the population.
On Feb. 27, if all goes right, the department will publish not only an updated CPI to reflect buying changes, but also a second, more comprehensive index covering all urban dwellers - highly paid professional, the unemployed and those on welfare, as well as wage earners. It will cover 80 per cent of the population, Shiskin said.
Several years ago the Labor Department wanted only to pubish the broader CPI, but union pressure forced publication of both.
The unions argued that the old-style index was at the heart of many collective bargaining agreements and that shifting to a new index would upset those contracts. Unspoken was their concern that a broader index would not rise as quickly and would result in smaller cost-of-living adjustments.
Shisking said his agency has not yet run any tests to determine whether a narrower index would rise more quickly than one covering all urban workers, but he said there is little reason to think it would.
Even though the new consumer price index is more up-to-date than the old one, the surveys to determine how Americans allocated their buying among food, housing, clothing and services were conducted in 1972 and 1973 before much of the sharp rises in oil and food prices that occured in 1973 and 1974 Those increases may have altered consumer buying patterns.
"That is a weakness," Shiskin conceded.
The expenditure surveys showed that between 1963 and 1973 Americans spent less of their incomes on food and more on housing and transportation.
Food and alcohol purchases, which account for 27.1 per cent of wage earner outlays in 1963, make up only 20.4 per cent of their outlays according to the 1975 survey.
Housing, on the other hand, took up 34.6 per cent of wage earner outlays in 1963 but grew to 39.8 per cent in 1973. Urban dwellers spent even more on housing: 42.9 per cent of their outlays.
Wage earners allocated 12.5 per cent of their spending to transportation in 1963, which grew to 19.8 per cent in 1973.
The new index monitor prices in 85 cities, compared with 56 in the current index, and will collect prices of some commodities more frequently than at present.
The Labor Department also conducted extensive surveys to find out where people shop. That may mean, for example, that Labor Department surveyers spend less time pricing washing machines in higher-priced department stores and more time in discount houses. One-fifth of the 20,000 establishments surveyed will be phased out each year on the bases of continuing surveys.
The new indexes will also contain a broader ranger of items than presently. For example, Shiskin said, the old index only measured the change in the price of men's haircuts. The new ones will guage price changes in a wide variety of services to the male head, including haircuts, shampoos and styling.
The CPI will continue to be an index number, computed as a percentage above a base year (1967) that is arbitarily assigned the value of 100. So when November's was 185.4 that meant roughly the same set of goods and services that cost $10 in 1967 cost 18.54 in November.
Despite all the updating and modifying of the consumer price index, it will still be, at best, an approximate guide to changes in the cost of living. For both the urban index an the wage earners index will measures a selection of goods and services whose weight in the index is fixed.
While the average consumer may stock up on cheap chicken one month and cheap pork the next, the index cannot.
Nor does it necessarily reflect the buying patterns of any individual consumer. If a consumer's purchases are concentrated in goods and services whose prices are rising faster than the average, his cost-of-living will increased more than the consumer price index.