Changing the Consumer Price Index

* A congressional task force has “discovered” that the consumer price index (CPI)--the most widely used measure of inflation--is imprecise (Dec. 4). But despite the task force’s recommendations, the CPI should not be “fixed.” The real problem is that we expect too much of the index.

If the price of bananas rises, I am worse off; my wages will buy fewer bananas and this is reflected in the CPI. But if the crime rate goes up, and I have to buy a burglar alarm, the CPI does not reflect the decline in my welfare. If auto makers are required to install pollution controls in their factories and raise the price of cars to pay for them, that price increase is reflected in the CPI. But if they are required to install a catalytic converter on the car itself, the resulting price increase is not reflected in the CPI. CPI methodology will always involve such anomalies. There is no perfect index of consumer welfare.

Years ago, Congress decided to adjust Social Security benefits and income tax brackets on the grounds that neither seniors nor taxpayers should be hurt by inflation. But today that means that if the CPI could be made to rise more slowly, Social Security benefits would also rise more slowly and taxes more rapidly, thus cutting the federal deficit. The political appeal of this “technical” solution to the deficit is obvious to representatives of both parties. Moreover, making the CPI rise more slowly will also make official measures of real wages and output rise more rapidly, thus forever “proving” to the electorate that they are better off than they were four years ago.

Congress can always change taxes and benefits if it wants to do so. It should not coerce professional government statisticians to do its work. Hands off the CPI!

DANIEL J.B. MITCHELL

Professor, Anderson Graduate

School of Management, UCLA

* We are now informed by “experts” selectively appointed by Congress that the CPI overstates the rate of inflation because it doesn’t reflect, among other things, a consumer tendency to substitute cheaper products for products that have risen out of the price range of his or her budget, i.e., chicken for steak.

By this reasoning, as chicken prices rise out of the reach of the average consumer, beans will be substituted for chicken and another adjustment in the CPI will be necessary. Then, as bean prices skyrocket, peasants will be reduced to substituting bread for beans, at which time Michael Boskin, head of the congressional commission, and members of Congress will look up from their $1,000-a-plate filet mignon dinners and declare the end of inflation because the price of stale bread remained constant for six months.

At least Marie Antoinette could suggest “let them eat cake,” when faced with peasants rioting for bread. Boskin’s reasoning would preclude such an upscale “substitution.”

ROBERT T. BERTHOLDO

Agoura