Measuring Inflation

Report Outline
Price Index under Attack
Development of Price Indexes
New Proposals and Debate
Special Focus

Price Index under Attack

Charge That CPI Itself Adds to Inflation

More than a decade of inflation has made the Consumer Price Index the best known and one of the most widely watched of all economic yardsticks. The CPI, said Fortune magazine, is “possibly the single most important statistic” the government produces. But a number of economists, government officials and business leaders contend that it is deficient in several ways. For one thing, states the New York Citibank's Monthly Economic Letter, the index exaggerates the inflation rate by the way it calculates fuel and housing costs. Even worse, Chairman Alfred Kahn of the Council on Wage and Price Stability told a congressional Task Force on Inflation in January, the CPI has become “part of its own problem.”

The problem, in Kahn's view, is that when the index advances, it automatically triggers cost-of-living increases for millions of wage earners and even greater numbers of people who receive benefits from Social Security and other federal and state programs. In 1974, the Bureau of Labor Statistics estimated that every percentage point rise in the index added $1 billion in federal payments to individuals. Five years later the General Accounting Office, Congress' auditing arm, calculated that the same increase could trigger more than $2 billion in federal spending. An official at the White House Office of Management and Budget estimates that currently one-third of all federal expenditures go to programs that are indexed to the Consumer Price Index.

Today cost-of-living adjustments apply directly to 65 million Americans, nearly a third of the nation's population. When dependents are added to this group, it forms nearly half of the country's 223 million people. The Labor Department reports that nine million American men and women in offices, stores and factories receive cost-of-living bonuses. Among workers covered by large union contracts, six of every ten get these bonuses.