Politicization of Inflation Data Feared : Economy: Analysts agree that changes are needed but say Gingrich plan could hurt credibility.

From Reuters

House Speaker Newt Gingrich's demand that the government's consumer price index be revamped so it does not overstate inflation has economists fretting that official economic data is in danger of becoming politicized.

Injecting politics into the formulation of the vast array of official economic data could raise questions about the credibility of the statistics, economists warned--although they agree that the CPI and other statistics need a face lift.

"There's a lot of danger of politicizing the whole process. And that scares me," said David Wyss of DRI-McGraw/Hill Inc. "We should be very careful to maintain the credibility of the statistical agencies. But on the other hand, our statistics are obsolete."

Over the weekend, Gingrich called on the Bureau of Labor Statistics to change the way it calculates inflation, saying such a move could cut the U.S. deficit by up to $150 billion.

The Georgia Republican also warned that if officials at the Labor Department agency can't make the adequate changes in 30 days, they could be out of work and their responsibilities transferred to the Federal Reserve System or Treasury Department.

House Majority Leader Richard Armey, a Texas Republican, also said over the weekend that the changes "should be done."

Economists agree that improvements are needed, and the Commerce Department has announced a sweeping overhaul of its data. But they fear that the use of political pressure could be harmful.

"They're trying to force the bureau into following procedures that will provide a more politically correct CPI," said Donald Ratajczak of Georgia State University.

"It is important for people to feel comfortable that decisions about how the index is constructed are being made on technical grounds and not political grounds," Bureau of Labor Statistics Commissioner Katharine Abraham said.

Gingrich spoke after Federal Reserve Board Chairman Alan Greenspan said last week that the CPI overstates the actual level of inflation by anywhere from 0.5 to 1.5 percentage points a year.

Noting that a higher inflation reading leads to higher Social Security and government pension payments and lower revenues from taxes pegged to inflation, Greenspan said the government could save up to $150 billion over five years by adopting a more accurate measure.

Economists note that the statistics bureau faces budget constraints.

"The statistical agencies have not been exactly flush with funds in recent years," said Robert Dederick of Northern Trust Corp., a Commerce Department undersecretary in the Reagan Administration.

The Bureau of Labor Statistics has been refining the CPI. Small changes will occur in the January data, but major reviews occur about every decade. The agency is looking at making updates more frequent.

The bureau's Abraham noted the CPI does not take into account when consumers substitute a higher-priced good for a lower-priced one--such as opting to buy chicken if steak becomes too expensive.

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