Consumer Price Index: Fear of Fiddling

Everyone agrees that the consumer price index, the nation’s most closely watched gauge of inflation, overstates annual changes in living costs, a miscalculation that skews federal payments and revenues while contributing significantly to budget deficits. A congressionally appointed commission headed by Stanford University economist Michael J. Boskin puts the error at about 1.1% annually. That may not sound like much, but 1.1% of hundreds of billions of dollars over not just years but decades adds up to very big money indeed. Knocking just one point off the CPI each year for five years, according to the Congressional Budget Office, would cut outlays by more than $85 billion while increasing revenues by almost $50 billion. Over 10 years, the difference could come to well over $600 billion. With savings to the Treasury like these in view, what’s standing in the way of a speedy overhaul of the CPI?

Two things. First, while there are some easy changes that can be made to more accurately reflect living costs, there are other changes that depend on highly technical assessments for which information may not be readily available. Second, the White House and Congress both are inclined to fly into a panic at the thought of sponsoring or endorsing changes to make the CPI more accurate. That’s because the revisions would slightly reduce the annual cost-of-living increases that are given to Social Security recipients and federal pensioners. Some income taxes would be raised modestly due to the annual adjustments widening inflation-indexed tax brackets. Both of these prospects strike cold fear into the hearts of Washington politicians.

Fear or not, the basic fact is that the CPI does not give an accurate picture of inflation. For one thing, the “basket” of thousands of goods and services that make up the index is revised only once a decade. The last time was in 1984, and the next time won’t be until 1998, meaning that regular reviews of prices don’t take into account changes in commerce and buying habits that may have taken place over the last dozen years. For example, the great growth in discount retailing. Nor does the index give adequate regard to the inclination of consumers to seek out cheaper products when prices for more commonly purchased goods rise.

Especially important is the index’s failure to properly measure quality improvements. A new car today costs a lot more than in 1984. But it’s likely to get better mileage and be safer and more durable, qualities that have to be weighed.

There is a powerful constituency of retirees and others prepared to fight anything beyond token revision of the CPI. But a measuring tool that clearly distorts the true rate of inflation is a broken tool, the sooner repaired the better. Republicans want President Clinton to be the point man in supporting CPI revision. The White House, fearing political lightning, is being cagey. But the CPI is put together under the Labor Department, part of the executive branch. Clearly it’s the president’s responsibility to lead.