Revised CPI Still Overstates Inflation, GAO Told

From Bloomberg News

The consumer price index overstates U.S. inflation by about 0.8 percentage point per year, even after changes in the way it’s calculated, according to former members of a congressionally appointed panel who studied the price indicator four years ago.

The Boskin Commission, named after Stanford economist Michael Boskin, who served as its chairman, reported in December 1996 that the CPI overstated inflation by as much as 1.1 percentage point a year.

The General Accounting Office asked the members of the commission whether changes in the way the CPI is collected and analyzed have reduced that bias. All four surviving members of the commission agreed that although the Labor Department has made improvements, more needs to be done.

“Certainly, a sizable upward bias remains in the CPI,” Boskin told the GAO. “Hopefully, future improvements [some planned or underway] will whittle away at the bias.”

Boskin put the remaining overstatement at 0.8 percentage point a year, as did Ellen Dulberger of IBM Corp. Robert Gordon, an economist at Northwestern University, estimated a remaining bias of 0.73 percentage point a year, and Dale Jorgenson of Harvard estimated 0.9 percentage point. The fifth member of the commission, Zvi Griliches of Harvard, died in 1999.


The GAO report was requested by Sen. Daniel Patrick Moynihan (D-N.Y.), the senior Democrat on the Finance Committee.

As a gauge of inflation, the CPI--which rose 2.7% last year--is used in many labor contracts to adjust wage levels, and it is used to calculate annual cost-of-living adjustments for Social Security and other government benefit programs.

If those adjustments were reduced by the amount of the remaining bias, it could significantly reduce the danger that the nation’s retirement program will run out of money sometime in the next couple of decades. A correction of 0.8 percentage point would eliminate more than half of the long-run Social Security deficit, Moynihan said.

But Bureau of Labor Statistics Commissioner Katharine G. Abraham disputed the former commission members’ conclusions.

“We don’t believe that it is currently possible to produce reliable estimates of bias in the CPI,” she said in a letter to the GAO.

The bureau has instituted seven major changes in the CPI during the last four years, and three more are planned between now and 2002.