| News Story
The Consumer Price Index (CPI) is most often used to measure inflation.
The CPI is used to determine the cost-of-living adjustments for
federal pensions and Social Security recipients, to adjust the standard
deduction and tax brackets for the federal income tax, and is incorporated
into a number of private contracts and leases as an inflation adjustment.
Given the importance and extensive usage of the CPI, it is not surprising
that its accuracy has been studied and questioned. Partly in response
to a variety of criticisms, the CPI has undergone a number of revisions.
The Bureau of Labor Statistics (BLS), the government organization
that supervises the calculation of the CPI, announced the last of
a series changes begun in 1995 to correct the CPI for biases. It
is estimated that the cumulative effect of all the changes is to
trim the measure of inflation by eight-tenths of a percent. The
last change, amounting to two-tenths of a percent, is designed to
account for substitution bias--the tendency for consumers to buy
more of a similar product that is relatively less expensive.
Lowering the rate of increase in the measure of inflation will
have a significant impact on the federal budget and the economy.
Tax revenues will increase since the income tax bracket, standard
deduction and personal exemption will be smaller than they otherwise
would have been. Government expenditures for cost-of-living adjustments,
like Social Security benefits, will increase less rapidly under
the new measure. With higher tax revenues and lowered expenditures,
the impact on the federal budget is to reduce the deficit or increase
the surplus. The impact on retirees affected by the change will
be to lower their benefits. (Updated May 19, 1998)