The first known price index was constructed by Count Gian Rinaldo Carli, an Italian professor and polymath, in 1764. Prices in Europe had been spiraling upward since the opening of trade with the New World. This ‘Price Revolution’, most notable in Spain and its neighbors, occurred with the inflow of large amounts of gold and silver. In Italy, many observers thought that prices were rising because Italy was getting richer as a result of accumulating gold from trade. To facilitate his study of rising prices, Count Carli collected prices of grain, wine, and oil from around 1450 and also from around 1755. For each commodity, he computed the percent change in price from the earlier to the more recent period. Then he took a simple average of those three percentage changes. This served as a basic measure of commodity price inflation. He did this using prices in terms of the Italian legal tender (lire), and then using prices in terms of gold and silver bullion. Prices in terms of lire had increased sharply, while those in terms of bullion rose only slightly. He concluded, therefore, that rising prices had resulted from the Italian government’s frequent debasement of the currency, rather than from growing wealth.
Governments around the world did not rush to adopt Carli’s methodology. Adoption came later, often driven by pressing circumstances. In the United States, one catalyst was the Civil War. To finance the war, beginning with the passage of the Legal Tender Act of 1862, the Union government began issuing paper money called greenbacks, unbacked by gold or silver. The greenbacks were the center of an intense debate about the constitutionality of paper money and the likelihood that it would lead to severe inflation. As the war progressed, Treasury Secretary Salmon Chase published rudimentary price indexes to demonstrate that, while high – prices roughly doubled during the war – inflation was not as bad as some feared.
Cost of living controversies
By the 1880s, labor unions were gaining strength and coming into frequent conflict with employers about whether wages were keeping up with price increases. Labor unions pushed for the creation of a government agency that could promote their interests. Employers, unsurprisingly, resisted. As a compromise, the Bureau of Labor was established in 1884, and was directed to simply collect and publish statistics about labor, without taking a particular stance.