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_______________________________

Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

Budgetary and Distributional Effects of Adopting the Chained CPI

Donald J. Marples, Specialist in Public Finance

March 7, 2014

http://www.fas.org/sgp/crs/misc/R43347.pdf

[full-text, 12 pages]

 

[excerpt]

This report examines the budgetary and distributional effects of using what is referred to as

the Chained Consumer Price Index (C-CPI-U or chained CPI) as the official measure of

inflation for adjusting federal revenue and spending programs for inflation.1

Several other variations of the Consumer Price Index (CPI) are currently used to make automatic

adjustments that affect both outlays and revenues. For example, the Consumer Price Index for

Urban Wage Earners and Clerical Workers (CPI-W) is the basis for adjusting Social Security

benefits,2  while the Consumer Price Index for All Urban Consumers (CPI-U) is the basis for

adjusting personal income tax parameters to keep up with inflation.3

Concerns by many over the ability of the Consumer Price Index (CPI) to accurately measure

changes in the cost of living are long-standing.4 At issue then, as now, was a concern that the CPI

does not accurately measure changes in the cost of living. In this respect, there is a broad

consensus that the chained CPI is a more accurate measure of inflation than those

currently in use.5

 

Further, if adopting the chained CPI is done for technical reasons, a case can be made that the chained CPI should

be used in all cases in which the federal government attempts to mitigate the effects of inflation.

While there are concerns about the accuracy of the CPI and a general consensus that the chained

CPI is a more accurate measure of inflation, there are no current legislative proposals to adopt the

chained CPI outside of more comprehensive entitlement or budget reforms. This observation

suggests that interest in adopting the chained CPI may have less to do with improving the

technical accuracy of the measure of inflation and more to do with budgetary considerations.6

 

Contents

Measuring Inflation: CPI vs. Chained CPI ...................................................................................... 3

Concerns with the Traditional CPI ............................................................................................ 4

Benefits and Drawbacks with the Chained CPI ......................................................................... 5

Budgetary Effects of Adopting the Chained CPI for Inflation Adjustments .................................... 6

Distributional Effects of Adopting the Chained CPI for Inflation Adjustments .............................. 7

Concluding Observations ................................................................................................................. 9

 

Figures

Figure 1. Measuring Inflation Using the CPI-U and the Chained CPI ............................................ 4

Figure 2. Deficit Reduction from Adopting the Chained CPI.......................................................... 7

 

Tables

Table 1. Percentage Change in Federal Taxes from Switching to Chained CPI-U, by

Income Group ............................................................................................................................... 8

 

Contacts

Author Contact Information........................................................................................................... 10

 

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