Recalculating the Consumer Price Index

A calculator with a tax button represents calculating your taxes.

Kai Ryssdal: We're pretty much obliged every month when it comes out to pass on to you a number that's officially called the Consumer Price Index. Inflation is the English translation. The CPI is useful for all sorts of things, from Social Security cost of living increases to what the Fed's going to do with interest rates.

There's a school of thought, though, that says if the government just changed the way inflation's measured, it could save hundreds of billions of dollars over the next decade -- an idea that you have to admit is pretty attractive right about now. From Washington, Marketplace's David Gura reports.

David Gura: To find out how we measure inflation, the government fills up a giant virtual shopping cart with all sorts of stuff: food, college tuition, computers, cigarettes. Then the Labor Department adds it all together to see if that shopping cart costs more than what it used to, and if inflation is going up. This is called the Consumer Price Index.

Robert Greenstein heads the Center on Budget and Policy Priorities. He says the government uses this data to set:

Robert Greenstein: Elements of the tax code, the dollar level at which each tax bracket ends and the next tax bracket begins, as well as things like Social Security benefits, veterans' benefits.

But many policy experts argue we should measure inflation differently. They say consumers change their behavior when stuff gets expensive. By not taking that into account, Marc Goldwein, with the Committee for a Responsible Budget, says:

Marc Goldwein: We are under-taxing and overpaying Social Security benefits relative to the spirit of the law, relative to what we're supposed to be doing.

Jim Kessler is with Third Way, a centrist think tank. He says consumers know how to stretch their dollars.

Jim Kessler: When the price of one product goes up, oftentimes consumers will decide, well, I'll just buy another product that makes me just as happy. It's the idea that you might switch from hot dogs to hamburgers if the price of hot dogs goes way up.

If we take that into consideration, the rate of inflation is actually lower. And experts like Robert Greenstein say this could save the country around $300 billion over the next decade.

Greenstein: So, the argument is: if we're overstating inflation and we have a more accurate measure of inflation, we ought to go to it, especially if that helps us with these very serious, long-term fiscal problems we face.

There's a lot of support for using this formula, but not everyone likes the idea. Congressman Xavier Becerra is a Democrat from Southern California. He says what some people call it a technical change:

Xavier Becerra: Is really a direct benefit cut.

Social Security payments would go down. But Third Way's Jim Kessler says not by much.

Kessler: You know, for a senior citizen, what it would mean is one less meal with your grandkids at Applebee's over the course of a year.

But the AARP says it would add up over the years to a lot of dinners at Applebee's. David Certner is AARP's chief lobbyist.

David Certner: If you were on Social Security, you may see a reduction of a few dollars in the first year, but that few dollars would compound over time, so that by the time you'd been on Social Security for, say, 15 years, you would probably be seeing 5 percent reductions in your benefits.

Certner says this would hit the oldest Americans hardest because they'd have less savings and higher health bills.

Greenstein: This is really a complicated issue.

Robert Greenstein says there is a solution: measure inflation differently, reap most of the savings, but offer more government assistance to those who really need it.

In Washington, I'm David Gura for Marketplace.

About the author

David Gura is a reporter for Marketplace, based in the Washington, D.C. bureau.
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Jim Kessler of a "centrist think tank" states that consumers who cannot afford hot dogs will instead eat hamburgers.

So, once the signal banner of corrosively decadent aristocracy, Mr. Kessler's distilled perspective is essentially, "The peasants have no bread? Well let them eat cake."

This is now a "centrist" viewpoint?

My esteem for Marketplace dropped a lot listening to this article. Mr Greenstein basically claimed that no inflation takes place if you switch from buying something to buying something else because the thing you *would have otherwise bought* is too expensive. I was listening for the commentators (Gura or even Ryssdal) to call Greenstein out on the deception he was proposing. To no avail.

To claim that all purchase choice changes that occur as prices fluctuate are "product[s] that makes me just as happy" (IE are equivalent) is insane. If he truly believes that, he should be willing to trade cars with me. If that's a true statement, he can be just as happy with my old beater as I'm sure he is with whatever fancy new car he can afford.

Sounds like lying to ourselves for the sake of lying to ourselves.

You have to hand it to politicians for creativity when it comes to making themselves look good while doing nothing.
That theory amounts to saying, I am a Mercedes owner, as prices of Mercedes keep rising, I decide to buy a lesser car, let's say a KIA, and come to the conclusion that car prices are going down.
How warped is that.
Inflation is supposed to reflect the movements of prices and implies comparison of prices for same products.
Already food and energy (whose prices most impact consumers) are not taken into account substantially under estimating the real rate of inflation.
It's about time that we put a stop to accounting gimmicks whose sole goal is to hide the real problems so that politicians don't have to tackle them.

As I listened to this, I thought perhaps I had become dislodged in space (to Fox?) or in time (to the early Alan-Greenspan 90s). We have truly been there and done that. Anyone who wants to read about Greenspan's frustration with Social Security and his assault on it via the debasement of the CPI should check out the Kevin Phillips book "Bad Money". Specifically, see the chapter "Bullnomics" (that's "bull" as in BS) and the section "The Consumer Price Index and Statistical Debasement". I think these guys from the Cato Institute (or whatever) are using this as their roadmap...just as the Republican Congress members are using the failed Bush Administration policies as theirs.

Do increases in taxes and fees count? What about new taxes and new fees? If they create a separate tax for water, separate for sewer, separate for garbage, separate for fire, separate for police- if your car breaks down and the police call a tow truck you get charged for this. Maybe if the taxes and fees get too expensive people can substitute something else like they can with food and energy.

http://www.bls.gov/news.release/empsit.t15.htm. By the way, U-1 is not what's reported by the BLS and then the mainstream modalities. They report the "official labor underutilization" figures the first Friday morning of each month. U-3 is used. While the fairer measure, more reality-based, is U-6. check the URL above, s'il vous plait

"The rich will only experience this on their incomes up to $106,800 then the rest is not taxed. This is sooooooo unfair."

This is because if you tax more, you have to pay the rich more when they retire.
The rich, presumably, do not need much SS when they retire. And since they've been paying up to $88k now $106k of taxed income, they are already maxing out their SSI which they don't need.
However, if we *decide* to tax the rich all the way up *AND* decide to cap their SSI benefits, *THEN* we can talk about balancing SS.

LIES!! LIES!! LIES!! The economists are spouting lies and you're reporting lies. In high inflation people are not just as "happy" with another choice they "settle" for another choice. You only took one step from hamburger to hot dog. Sounds benign enough. The economist's know they are not analyzing this vertically or horizontally enough. Here's the proof. If a person started with an expensive steak then with inflation had to move to less expensive steak, more inflation and they buy hamburger, another year of inflation thy're forced to choose hot dogs. Finally in the 5th year they have to buy the generic version of Spam. That's horizontal movement, wihtin the same expense category. Now if the economists were telling the truth that consumers are happily choosing the alternative with the same gratification then expensive steak = generic spam, not just hambuger= hotdog as you stated. We know this isn't true because when that consumer was buying expensive steak they could have chosen generic spam instead, but didn't, until inflation forced them to "settle" on eating generic spam. Maybe it's now a choice between eating hamburger or filling a lifesaving prescription. That's a vertical decision, trading one expense for another. Are the economists saying that the consumer is also getting the same gratification from the generic spam as the lifesaving prescription also? These are the same lies that we were told when the unemployment rate calculation was changed. Who really believes that a person that has "given up or settled" on permanent unemployment, doesnt count as an unemployed person? It's in every decision maker's best interest to understate the inflation rate and the unemployment rate. Politician's love them to be undrstated for reelection, big business benefits from the understatement by keeping wages lower and relieving political pressure to add US employees, wall street benefits by increasing stock prices in low inflation and low unemployment environment, indexed payors want them understated, budgeters and economists all benefit from the understatemnt lies as mentioned in your article. Everyone benefits except the unemployed and the consumer. Who cares about them as long as we can convince the masses the economy is doing well with low unemployment and low inflation?

As for SS, I don't believe the issue is totally one of improperly calculated CPI, although I completely agree with it. It's the old figures lie but liars figure. But if we want to get ahead of the curve, why don't we completely remove the income cieling on the SS Tax? SS taxes your income at 6.2% up to $106,800 in income (socialsecurity.gov). You could actually reduce that rate to 3 - 4% for everyone if you taxed everyone on 100% of their income. Why isn't this being looked at??????? Is the answer lobbyists or is it the very lawmakers who don't want to see their taxes go up? The vast majority of Americans will have SS dollars taken out of every paycheck for their whole working lives. The rich will only experience this on their incomes up to $106,800 then the rest is not taxed. This is sooooooo unfair.


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