Stunting the CPI would help slow spending but hinder revenues.

• Author: Grossman, Hyman C.
• Position: Consumer Price Index

A downward revision in the nation's key inflation measurement, the Consumer Price Index (CPI), would be a two-edged sword for public finance. That is, programs whose spending would be slowed in line with the revised formula would save billions of dollars for states and local governments in labor contract adjustments and in pension benefits. But offsetting the slower growth in expenses would be constrained revenue-raising capacity where tax and spending formulas follow changes in the CPI or personal income.

The ongoing debate on whether to and how to adjust the CPI picked up steam recently when an independent commission appointed by Congress to report on the credibility of the CPI submitted its findings. The commission, headed by Michael J. Boskin, a Stanford University professor and former chairman of the Council of Economic Advisers under President George Bush, concluded that the government was annually overstating the inflation rate by 1.1 percentage points, costing it billions of dollars in extra spending primarily on Social Security and other benefit payments. In 1995, Federal Reserve Board Chairman Alan Greenspan suggested that the method for measuring inflation ought to be reexamined with an eye toward yielding slower inflation growth.

Slower growth in the CPI also would slow inflation-adjusting indexing, moving many taxpayers into higher personal income tax brackets and reducing the growth in personal exemptions for federal taxes and for state and local governments that follow federal tax guidelines. By 2002, a drop of 1 percentage point in the CPI would yield more than $21 billion to the federal government in additional tax revenues according to the Congressional Budget Office. On the other side of the ledger, federal, state, and local government spending would grow more slowly if Social Security and other benefits (such as cost-of-living adjustments - COLAs) were tied to a slower-growing CPI.

Perceived Flaws

The CPI for many years has been established monthly by the federal Bureau of Labor Statistics. As currently formulated, the index measures the cost of buying a fixed basket of goods and services representing the purchases of urban consumers. This basket has not changed since 1982. Critics suggest that the overstatement of price changes is due to a failure to take into account advances in technology and efficiencies. Some contend that the CPI exaggerates inflation because it ignores quality improvements and enhanced productivity...