How Government Should Cheat on the CPI
It's bad enough that the government measures inflation as "core inflation" excluding energy and food, as though we aren't buying those things. But now members of both parties want to save money by switching to another measure of inflation that substitutes the favorite things you buy for inferior products you don't want - because if you switch from steak to hamburger, then the new hamburger at the old price of the steak means NO INFLATION. Your life style may plummet, and your health may too, but that's besides the point, according to Bloomberg's mindless analysis. ~ Ilene
Courtesy of Dr. Paul Price (at Real Money)
Those who fill our own gas tanks, pay utility bills, contract for our own healthcare and purchase groceries know intuitively that inflation has been quite high over the past few years. Government agencies tell us we’re wrong and that prices have only risen 2 – 3% annually. They love to speak about ‘core inflation’ which excludes food and energy. Please raise your hands if you don’t partake of those items and thus don’t care about their costs.
This week’s Bloomberg Businessweek (Apr. 30 – May 6, 2012 issue) proposes a bipartisan deficit fix they say would produce $300 Billion in combined savings and tax revenues over the next decade. How would they accomplish this? Switch from the current standard CPI calculation – the Bureau of Labor Statistics market basket of 80,000 goods and services weighted to reflect what they claim are consumer spending patterns - to the BLS’s chained CPI.
What is chained CPI? The BLS says that when prices for specific items go up, consumers often substitute lower-cost goods instead of buying their old favorites. While the standard CPI measures the same basket of goods every month the chained CPI would assume steak lovers would trade down to hamburger or Granny Smith apple fans would settle for lower priced oranges should apple prices surge. Bloomberg suggested that consumers might even react to price increases in one item by going to another category altogether. If ‘bacon and eggs’ gets too expensive, why not simply have some cold cereal?
This alternative measure of including price substitutions is literally an apples-to-oranges comparison rather than noting the change in prices of exactly the same goods and services from the month before, as the average person would expect.
The chained CPI would assume that higher absolute prices force people to ratchet down their standard of living rather than pay more to maintain their normal choices. BLS says that this would lower reported CPI by 0.25 to 0.35 percentage points versus the apples-to-apples standard CPI calculation.
The Congressional Budget Office [CBO] estimates that the lower, chained CPI, would save $112 billion in Cost of Living [COLA] adjustments to Social Security recipients alone over 10 years. They see another $33 billion in COLA savings from other indexed Federal spending such as pensions, plus adjustments of tax brackets, exemptions, credits and deductions.
Bloomberg notes that many people’s wages would then be rising faster than the newly adopted CPI index, generating another $90 billion in extra taxes due to bracket creep over the next decade. They claim it would also reduce interest payments on the debt from inflation-linked Treasury bonds [TIPS] by $44 billion more over the next 10 years.
Businessweek’s editorial mindset is to skew the reported numbers to lessen government outlays while raising taxes without any fanfare or public debate.
Bloomberg thinks that retirees, savers and taxpayers should all accept lower standards of living in order to fund $300 billion in extra taxes and/or forgone COLAs. Those who bought TIPs thinking they were getting true inflation protection, via honest reporting of government statistics, can go straight to hell. Do NOT pass GO, do NOT collect $200.
Sadly, Congress and the White House seem incapable of agreeing on substantive measures to tackle the $10.4 trillion mountain of U.S. debt.
But there is one long-overdue piece of important business that can and should get done: The adoption of a more accurate gauge of U.S. inflation that would yield immediate savings and help put the economy on firmer ground. The fix has already been endorsed by lawmakers in both parties, the Obama administration, many economists and a series of bipartisan deficit-reduction panels. Best of all, it would help shore up Social Security. Trustees for the retirement fund on April 23 projected it would run dry in 2033, three years earlier than last year’s forecast. (my emphasis)