Consumer Price Index Gets a Final Corrective Tweaking

The government on Thursday announced plans to revamp the nation’s main inflation gauge, affecting everything from Social Security benefits to labor contracts and investments that are tied to the index.

The announcement marked the end of a series of changes in the consumer price index that were begun in 1995 to correct for the CPI’s tendency to overstate the actual rise in the cost of living. The changes affect the vast majority of Americans and the budgets of governments at all levels, because the CPI is used to determine cost-of-living adjustments in government benefits and for adjusting features of the income tax such as standard deductions and tax brackets.

The new formula for the consumer price index, called the “geometric mean,” will attempt to capture consumers’ tendency to substitute among similar items in response to price rises, such as buying frozen yogurt when the cost of ice cream goes up.

The change will probably trim the growth rate in the CPI.

“It is expected that the rate of growth of the CPI will be reduced by about two-tenths of a percentage point per year,” said Katharine Abraham, commissioner with the Labor Department’s Bureau of Labor Statistics.

Trimming the CPI’s rate of growth would mean slower increases in government benefits such as Social Security. Workers whose wage rises are linked to the index would also be affected, as would holders of inflation-indexed bonds.

The change is slated to take effect with the January 1999 CPI report to be issued next February.

Plans for revising the CPI come at a time when inflation is already low. In the year ended in March, the CPI was up a mere 1.4%.

The adoption of the geometric mean formula follows a series of technical adjustments over the last couple of years that have cut the CPI’s rate of growth by half a percentage point or more, according to government estimates.

Some of the tweaking has included new ways to calculate hospital payments and computer prices.

The department at the start of this year completed its periodic overhaul of the CPI’s market basket. That change assigned new weights to the various goods and services measured by the CPI and was expected to curb the index’s growth rate as items such as consumer electronics, which have been falling in price, took on greater weight.