Price Index Too Volatile, May Be Adjusted : Data: The Labor Department will try another method. It says the CPI inflates inflation.

The Bureau of Labor Statistics is considering changing the consumer price index, one of the government’s most widely used statistics, because of new evidence that it substantially overstates increases in the cost of living.

BLS researchers found that the index, which rose 2.7% in the last 12 months, magnifies the inflation rate as much as 0.6 percentage point each year. That may not sound like much, but for this year it means the inflation rate may be overstated by 25% or more.

Commissioner Katherine G. Abraham said the bureau, beginning in 1995, will use the researchers’ alternative calculation methods--which produce a lower rate--in experimental versions of the CPI. Any permanent change in the CPI is probably at least five years away, according to BLS officials.

The index, which tracks price changes across the country each month for everything from new cars to cookies to a day in the hospital, has a significant impact on the overall economy. It is used to determine annual increases in Social Security payments, wages in many labor contracts, some office building leases and even some alimony payments.

Reported inflation rates also have a major impact on interest rates. If the index were changed and the inflation rate reported as half a percentage point lower, interest rates likely would be reduced as well.

The BLS researchers say that the index as now calculated ignores changes in consumer behavior that result from changing prices. Specifically, the economists say that by focusing on the prices in a fixed “basket” of goods, the index ignores the substitutions people make when one item in the standard basket becomes cheaper or more expensive.

The current version of the index measures changes in the cost of a fixed basket, or set, of goods and services. The weight of each component--food bought in grocery stores, women’s clothing and so on--was determined from a survey of how Americans spent their money in the years 1982 through 1984.

The index is based on the notion that consumers get the same benefits year after year if they spend their money on the same goods and services bought in the same types of stores.

In reality, though, people often vary their purchases as prices of different goods and services change relative to one another.

When fuel prices soared in the 1970s and early 1980s, for example, people bought less gasoline and insulated their houses to cut their driving and heating expenses. And, as the cost of computers has tumbled, spending on them has risen sharply in relation to purchases of other consumer items.

People also may decide to buy goods at discount stores, choosing lower prices over customer service.