A Simple Proposal that Can Yield Substantial Savings Over Time

Publication Date: May 2004

Publisher: Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Robert Greenstein

Research Area: Economics

Keywords: Fiscal future; Economic projections; Financial projections

Type: Report

Abstract:

A number of federal entitlement programs, of which Social Security is the most prominent, provide benefits that are adjusted each year to keep pace with inflation as reflected in the Consumer Price Index. Similarly, a number of features of the tax code are adjusted annually for inflation, also as reflected in the CPI.

Research indicates, however, that the CPI slightly overstates inflation. This is a judgment that most experts — including analysts at the Bureau of Labor Statistics, which maintains the CPI — share.

As a result, BLS has recently developed an alternative CPI, sometimes known as the “superlative CPI,” which takes into account the tendency for consumers to substitute products whose prices have increased more slowly for products for which prices have increased more rapidly. The BLS began to issue inflation estimates using both the traditional CPI and the new, superlative CPI in the summer of 2002. The superlative CPI is expected to rise, on average, about two-tenths of one percentage point less each year than the traditional CPI.