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Gerald B. Jacobs, Moorhead, Published May 10 2013

Letter: A change in CPI is bad news

One part of the statistical measure of our country’s economic performance is the Consumer Price Index. Most people recognize this as the most common measure of the price of goods and services in our economy. Based on the CPI, inflation adjustments are made to wages, Social Security payments, pensions and the like. People believe that the Bureau of Labor Statistics provides this information in an accurate and reliable way.

That may change. President Barack Obama’s recent budget recommendations to Congress offered to replace the CPI with something called a “chain consumer price index”(C-CPI). This was not because the Bureau of Labor Statistics thought the accuracy of the current CPI would be improved by such a replacement. It is purely a political act offered as a concession to Republicans, who originally came up with the idea. By changing the way price statistics are assembled, the government will save a lot of money since inflationary adjustments – based on the C-CPI – will cost the government less. The money, of course, will come mainly from ordinary people.

A Google search shows a Bureau of Labor Statistics comparison of the current CPI inflation rate with the C-CPI level since 2000. The results are clear: except for one year, the C-CPI produced a lower level of price increases every year. Had the C-CPI actually been implemented, it would have effectively resulted in a de facto tax increase. The money generated could become astronomical in the future considering the BLS examples were compiled in years when inflation was very low.

The C-CPI is a statistical sleight of hand that politicians hope will be accepted with little resistance by the population. However, people soon will discover that not only Social Security income will fail to keep up with inflation, but neither will military pensions, military disability payments, state and federal government pensions, income tax exemption thresholds, and even investments, such as inflation-adjusted bonds (I Bonds) or other financial items typically adjusted for inflation – all will be negatively affected if the C-CPI is substituted for the current CPI.

In a significant footnote, the BLS says this C-CPI is more like a cost-of-living index. They are right. It moves away from a price index. Here’s a simplified example. You have a budget of $100, allowing you to purchase steak as part of your cost of living. Then you find steak prices soar and you shift your diet to eating dog food, but still spend $100. Your cost of living didn’t then go up: still $100. No inflation will therefore be shown in the C-CPI. However, your standard of living will have slipped.

If the C-CPI is passed, a lot of people’s standard of living will slip.