New Analysis Shows CPI Lower Than Believed

An experimental consumer price index released Thursday showed that the lowest inflation rate in a generation might have been even lower than the official numbers reported, the Labor Department said Thursday.

Using a different approach to analyzing the vast data that the department uses to measure consumer inflation, the report showed the experimental CPI rose 2.9% last year rather than the 3.3% reported officially.

The experimental CPI, which will be tracked on a month-to-month basis for the rest of this year, was given high marks by Stanford University economist Michael Boskin, appointed by Congress to investigate the bias in the CPI.

“We look forward to the (Bureau of Labor Statistics) moving with all deliberate speed--emphasizing both deliberate and speed--to implementing the geometric mean in the official CPI, as opposed to just an experimental index,” he said. The geometric mean is a mathematical formula.

But the report also came under fire from some economists, who feared it would lure Washington policymakers into a false sense of security at a time when inflation might be lurking.

“The economy is strong, unemployment is falling and inflation may be accelerating, but all this might be obscured by this kind of report, experimental or not,” said David Jones of the brokerage Aubrey G. Lanston & Co. “It’s a matter of timing.”

Meanwhile on Thursday, industry figures show many U.S. retailers reported lower-than-expected sales in March, as shoppers passed on paying full prices for spring clothes after two months of post-Christmas clearance sales. Many consumers are paying down debt and saving for retirement if they can’t find a bargain, analysts said.

Separately, the Labor Department said the number of Americans applying for state unemployment benefits unexpectedly rose by 6,000 to a seasonally adjusted 318,000 in the week ended April 5. The four-week average of new jobless claims also rose.

The Labor Department’s CPI report generally confirmed its belief that switching to a system using the geometric mean as opposed to the straight arithmetic approach would show a reduction of one-quarter of 1% per year.

Officials said the system helps adjust for the so-called substitution factor in which consumers, faced with a price jump for one item, will seek to substitute it with something less expensive.

Comparing the new, experimental index with a similar--but not identical to the official CPI--proxy index, the department found that inflation rose 16.2% for the experimental rate and 18.6% for the proxy rate between December 1990 and February 1997.

Although the changes are small, they carry a heavy political element because the CPI is used to set increases in benefits that millions of older citizens get through Social Security to make up for inflation.

The closely watched index is also used to calculate tax brackets and personal exemptions for income tax and is widely used in commercial and union contracts.

Any change in the official CPI as a result of the experimental effort will probably not be included until January 1999.