Don’t Stall on Inflation Index

Economists often have trouble agreeing on what the numbers they look at really mean, as we’re seeing once again in the controversy over the consumer price index. A commission appointed by the Senate Finance Committee reported recently that the CPI overstates the rate of inflation by 1.1% a year. Since the CPI is the most closely watched gauge of inflation and is tied to about 30% of federal spending, even a seemingly small distortion can add billions of dollars to the budget. The commission, headed by Stanford University economist Michael J. Boskin, proposed some early corrective actions. But apparently that’s not to be.

The Bureau of Labor Statistics, which collects the data that shape the CPI, denies that its numbers and interpretations significantly exaggerate the inflation rate. Further, says Katharine Abraham, the commissioner of labor statistics, the complexities of trying to quantify subjective consumer behavior rule out making any early changes in the index, which was last revised in 1984. Abraham says the next revision won’t be until early 1999. Consumer products and tastes have of course changed a lot since 1984, and it’s clear that the fixed basket of goods and services the CPI tracks for price fluctuations doesn’t accurately reflect all those changes. Adjusting for quality improvements or consumer substitutions when prices rise is no doubt technically challenging. The CPI’s accuracy nonetheless needs to be improved.

While waiting for those improvements, Congress could simply choose to reduce the cost-of-living adjustments (COLAS) annually given to Social Security recipients and federal retirees to bring the rate of increase closer to the true rate of inflation. But Congress apparently has virtually no interest in doing so, for fear of inviting accusations that it’s trying to trim the deficit by snatching from the elderly what’s rightfully theirs. The real point, though, is that there’s nothing right about using a CPI based on erroneous information to make cost-of-living adjustments. Everyone pays for that mistake. To allow it to go on unchecked for years more is a burden not just on today’s taxpayers but on future generations as well.