Bipartisan Push Is Welcome to Fix a Flawed Price Index

The political logjam that has blocked reforms in the consumer price index may be breaking up. President Clinton has given aides a green light to explore Senate Majority Leader Trent Lott’s idea for a panel of experts to recommend whether and by how much Congress should revise the index, the nation’s main yardstick for measuring inflation. Sen. Tom Daschle (D-S.D), the minority leader, similarly finds merit in his Republican counterpart’s idea. Cheering both parties on is Federal Reserve Chairman Alan Greenspan, who again told Congress on Tuesday that the government is shortchanging itself by overgenerous cost of living adjustments based on a flawed index.

What seems to be shaping up is a pragmatic bipartisan consensus that the most effective way to get a more accurate gauge on the rate of inflation--with results that could mean a trillion-dollar difference in federal revenues and outlays over the next decade--is by having both parties deeply involved, thus providing political cover to all.

Organizations such as the American Assn. of Retired Persons are among those warning of retribution at the ballot box if the index, on which annual cost of living adjustments in Social Security and federal pensions are based, is significantly changed. Social Security payments would in fact be the prime area for the greatest cumulative budgetary savings should the index more truly reflect living costs, though the impact on individual monthly checks would be small. For example, if annual cost of living adjustments were reduced by the full 1.1% by which a congressional commission has found that the index overstates inflation, this year’s monthly increase in Social Security payments would have been $13 instead of $21. In other words, the benefit would still grow, though the rate of growth would not be as great.

The main fault of the index is that it doesn’t give a true picture of living costs. Because it’s updated only once a decade by the Bureau of Labor Statistics--the next revision is due late next year--it’s often far behind times in taking into account new products, changing consumption habits and quality improvements that raise living standards.

Most notably, it lags in taking note of switches by consumers to cheaper alternatives when prices rise. An individual decision to, say, drink prune juice instead of orange juice if a poor citrus crop sends prices soaring may not seem like an act of major economic consequence. But if the consumer price index continues to include orange juice in the basket of goods it prices, regardless of what might be falling demand, the inflation measurement will be skewed.

One-third of federal spending is affected by the index. So are tax brackets, which are indexed for inflation. A more accurate index would significantly reduce what the government spends while modestly increasing its revenues. Everyone now accepts that the index needs revising. The argument is over how much it exaggerates inflation and how soon changes should be made. The nonpartisan Concord Coalition offers a sensible proposal: Adjust all federal indexing by 0.5% immediately, while moving more cautiously to correct the systemic problems of the consumer price index. That would be a responsible beginning on a complex and controversial task. It’s one that merits the bipartisan support that’s beginning to take shape. Because it’s updated only once a decade, the index is often far behind times in taking into account changes that raise living standards.