What's Not to Like About the Chained CPI?

You just knew that, at some point in the budget debate, policy makers would turn to a different version of the inflation calculation in order to accomplish what is quite difficult to accomplish otherwise – cut spending and raise taxes. Recall that the chained CPI has been around for almost a decade now and it purports to better track the shift in consumer buying patterns, for example, when seniors can no longer afford hamburger and turn to dog food.

This story at the WSJ Real Time Economics blog has all the particulars:

One proposal in the budget talks that is getting a serious look would switch the government's way of measuring inflation and delivering a big impact on tax, spending, and entitlement programs. How big? It could save roughly $300 billion over 10 years.

The idea of using this different measure of inflation, known as a “chained” Consumer Price Index, has won support from numerous deficit-reduction commissions as well as many liberal and conservative economists.

To be sure, it's complicated stuff. But it's seen as a central way of reducing the deficit because it simultaneously cuts spending growth and increases tax revenues. And many also like it because much of its impact doesn't come from “cuts” in spending. Rather, it would reduce the “growth” of spending pegged to inflation. And it would affect the way tax brackets and deductions adjust for inflation, so it could appear less like a tax increase than simply raising tax rates.

The main Consumer Price Index is a measure of the average price change of a fixed basket of goods and services purchased by the average urban household; that doesn't reflect the reality that when, for instance, the price of pork goes up and the price of beef doesn't, consumers tend to shift from pork to beef. To account for this, and to better track the actual changes in the cost of the living, the Bureau of Labor Statistics has been publishing the chained CPI since 2002. The chained CPI generally increases more slowly than the main CPI measure.

You'd think that this is already a done deal in the ongoing budget debate.

Seriously, what's not to like about a change such as this for politicians who need to go to the electorate next year and ask for their vote. Do you really think seniors are going to go, “Hey, I just plotted the old and new inflation numbers and the new one is consistently about 8/10ths of a percentage point lower. That's going to cost me $90 this year”.