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December 11, 2012 10:28 AM Chained CPI and “True Inflation”

By Ed Kilgore

If you are trying to follow the fiscal talks (or are for whatever reason a connoisseur of deficit reduction menu items) you probably know all about “chained CPI,” a method of calculating consumer inflation that happens to cut indexed spending increases and tax bracket adjustments in ways that generate many hundreds of billions of dollars in deficit reduction over an extended period of time.

The brief case for using “chained CPI” instead of traditional inflation measurements is that it more accurately captures product substitutions that consumers make when prices on particular items go up. But as Matt Yglesias notes, it also tends to underestimate the impact of inflation on the very consumers—i.e., the low-income elderly—most affected by such downward adjustments, who cannot “substitute” lower-priced goods and services for, say, life-giving health care or prescription drugs.

[I]n terms of accuracy, it should be noted that the BLS also calculates the Experimental Price Index for the Elderly (CPI-E) for reference purposes weighted to the basket of goods consumed by the elderly and finds that these prices generally rise faster than the regular index. Grandma buys a lot of health care services and isn’t so interested in the falling price of an iPad 2. So if you’re looking to trim benefits in keeping with the spirit of the program, it’s important to note that many Social Security beneficiaries already see quite meager monthly checks. That’s why thoughtful reform plans like the 2005 one from Peter Orszag and Peter Diamond at Brookings or Christian Weller’s 2010 plan for the Center for American Progress specifically include enhanced benefits for the poorest seniors and the very elderly even while switching to the chained index.

If the idea is to more accurately measure true inflation in calculating indexed benefits, tax brackets, and (lest we forget) government contracts—that’s fine, but there’s no reason to think there is a single measurement that works in every case. And if it’s just a way to introduce slow-motion benefit cuts, admitting that’s what is going on is essential.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • c u n d gulag on December 11, 2012 10:47 AM:

    Feck the cost of an I-pad, or Mac, or Apple, or cellphone, or whatever.

    The growing economies of (formerly?) 3rd World countries, and speculation, keep gas and home heating oil prices high.

    And, the droughts and floods caused by global warming/weirding all over this country (and world) have caused food prices from bread, to grains, to meats, to pretty much anything we put in our mouths, to spike.

    But, unless I'm wrong, gas, heating oil, and food aren't counted towards inflation.
    And hence, inflation is low.
    And how convenient is THAT?!?!?!

  • Peter C on December 11, 2012 11:27 AM:

    So, the Chained CPI is just a technocratic means of cheating Grandma. Yup, that sounds like a Republican idea.

    How about we see a huge AARP smack-down of this Republican idiocy? Let's see if we can change the voting dynamic of the 'over-65' demographic.

  • T2 on December 11, 2012 11:47 AM:

    when discussing the "problems" with "entitlements" and their possible solutions, it is important to remember that at the core of Conservative thinking, the full elimination of Medicare, Medicaid and Social Security is the long-term goal. Therefore nothing that actually helps the solvency of these programs will come from Conservatives, even if they lie and say the opposite. Which they do.

  • Walker on December 11, 2012 12:44 PM:

    "Substitutions" is a horrible economic practice that I have long complained about. These actions assume that these substitutions are relatively equal, or at least minimally worse.

    If you want a true measurement of inflation, you must have something that tracks quality. And the only way to do this is to have some notion of total cost of ownership.

    As an example: I used to be an extremely loyal customer of a domestic shoe manufacturer. I would buy a new pair from them every 24 months. They shipped all of their manufacturing overseas. Soon after this happened, the next pair I bought from them lasted 4 months. Thinking this was a fluke, I got a another pair, which also lasted 4 months.

    The purchase price of the shoes had remained unchanged. Hence the effect on the CPI was zero. But because of total cost of ownership, the actual cost for these shoes had increased 500%.

  • paul on December 11, 2012 2:09 PM:

    Some substitutions don't imply a loss (if broccoli is expensive this week, I'll buy green beans), but others do.

    And the thing is, BLS statisticians try to account for this sort of thing (you can read up on "hedonic adjustments) but the real screwup here is, as Ed points out, that older people simply don't buy the same set of goods. The fact that smartphones and laptops are getting cheaper, or that house prices and rents in some other part of the country are going down, simply doesn't matter to them as much as the fact that the cost of their prescriptions or home health aides is going up.