The Consumer Price Index is a measure of the change in prices consumers pay for different goods over time. This index is often used as a benchmark for inflation. However, the inflation levels the Consumer Price Index suggests are not without controversy. Often inflation is accused of being overstated or understated. So what is the truth? And why would it be either?
Yes, inflation is understatedShow moreShow less
The government has a vested interest in inflation being understated, and the data it is based on it largely theoretical.
It costs the government huge sums of money to pay cost of living adjustments to Social Security. Since it is also the government that computes the Consumer Price Index (CPI), there is a clear conflict of interest and a clear motivation to understate the CPI.
The major change in the way CPI was calculated comes from the recommendations of the Boskin Commission, who were appointed by the United States Senate in 1995 to study possible bias and overstating of inflation in the computation of the CPI.
Understating inflation was a way to reduce expenditures to balance the federal budget and rescue the Social Security trust fund from insolvency in the next century. The beauty of it all was that the solution did not involve raising new taxes or changing benefit formulas. Instead, the solution involved “fixing” a biased method of adjusting social security benefits for the effects of price inflation.
Dean Baker argues that the Boskin Commission misjudged the extent to which the current method of determining the CPI leads to ‘quality bias,’ defending in the process the CPI’s existing value. Baker writes that the issues surrounding the debate over the CPI “are far more complicated and less one-sided than has generally been presented,” and notes that any changes in its determination should be left to the Bureau of Labor
Statistics (BLS), not a political process.
[P1] Inflation costs the government huge amounts of money through Social Security.
[P2] The government has a clear incentive to understate inflation.