Chris HopkinsRepublicans and Democrats are inching toward a more constructive engagement in the battle to defuse the debt bomb. President Obama made a significant contribution last week with the release of his proposed budget, in which he advocated a shift to so-called “chained” CPI to adjust spending and taxes for inflation.
This focus on chained CPI will intensify over the next few weeks as more attention is focused on the concept. So just what is it, and how will it affect the average American?
Most federal benefit programs automatically adjust for inflation. Social Security, for example, ratchets up each year based upon a specific price index. This was not the case before 1975, when Congress anchored yearly benefits to changes in the Consumer Price Index, or CPI. First constructed in 1913, the CPI is the most widely recognized price index for the U.S. economy and was therefore selected as the obvious benchmark for benefit payments.
However, it is well known that
the CPI overstates the true cost of living over time. Hence the Bureau of Labor Statistics began publishing an alternative index in 1999 that seeks to more accurately track the household inflation rate. This revised metric, called “chained CPI”, enjoys broad (although not universal) acceptance among economists as a much better reflection of changes in the cost of living.