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Recalculating the Consumer Price Index

David Gura Jun 30, 2011

Recalculating the Consumer Price Index

David Gura Jun 30, 2011

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.

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