Chained CPI and “True Inflation”

If you are trying to follow the fiscal talks (or are for whatever reason a connoisseur of deficit reduction menu items) you probably know all about “chained CPI,” a method of calculating consumer inflation that happens to cut indexed spending increases and tax bracket adjustments in ways that generate many hundreds of billions of dollars in deficit reduction over an extended period of time.

The brief case for using “chained CPI” instead of traditional inflation measurements is that it more accurately captures product substitutions that consumers make when prices on particular items go up. But as Matt Yglesias notes, it also tends to underestimate the impact of inflation on the very consumers–i.e., the low-income elderly–most affected by such downward adjustments, who cannot “substitute” lower-priced goods and services for, say, life-giving health care or prescription drugs.

[I]n terms of accuracy, it should be noted that the BLS also calculates the Experimental Price Index for the Elderly (CPI-E) for reference purposes weighted to the basket of goods consumed by the elderly and finds that these prices generally rise faster than the regular index. Grandma buys a lot of health care services and isn’t so interested in the falling price of an iPad 2. So if you’re looking to trim benefits in keeping with the spirit of the program, it’s important to note that many Social Security beneficiaries already see quite meager monthly checks. That’s why thoughtful reform plans like the 2005 one from Peter Orszag and Peter Diamond at Brookings or Christian Weller’s 2010 plan for the Center for American Progress specifically include enhanced benefits for the poorest seniors and the very elderly even while switching to the chained index.

If the idea is to more accurately measure true inflation in calculating indexed benefits, tax brackets, and (lest we forget) government contracts–that’s fine, but there’s no reason to think there is a single measurement that works in every case. And if it’s just a way to introduce slow-motion benefit cuts, admitting that’s what is going on is essential.

Ed Kilgore

Ed Kilgore, a Monthly contributing editor, is a columnist for the Daily Intelligencer, New York magazine’s politics blog, and the managing editor for the Democratic Strategist.